By Damien Hoffman
Today, President Obama signed the Dodd-Frank Act into law. It’s another doozy of a forest killer. Why waste your gorgeous summer day when you can just read our Cheat Sheet to the New Wall Street Reform Law?:
- The Volcker Rule: Don’t call it a comeback. Large financial firms are limited to investing in 3% or less of a bank’s Tier 1 capital. Moreover, banks are prohibited from bailing out funds in which they have an investment.
- Derivatives: The over-the-counter derivatives market would finally come under regulatory jurisdiction after the first experiment made Warren Buffett look like a prophet when they led to “mass destruction.” There is now new capital, margin, reporting, record-keeping and business conduct rules. Most derivatives will be traded on exchanges and routed through clearinghouses.
- “To Big To Fail” IF You’re Failing: If a firm is so big that it would destabilize the financial system in the event of failure (read: screw up all our lives like 2007-present), the Feds can now seize and break up the cancerous firm without taxpayer bailouts. The FDIC would deal with the liquidation. Treasury would pay the up-front costs, but losses would be recouped by assessing fees on financial firms with more than $50 billion in assets. Also, if an insurance firm is a systemic risk (think “AIG”) they will fall within the powers of the powers that be.
- Basic Mortgage Standards: If you think people should have the ability to pay back a mortgage before they receive a loan for hundreds of thousands of dollars, your savior is here! There are now national minimum underwriting standards for home mortgages: borrowers should be able to repay a home loan by verifying the income, credit history, and job status. Also, the pesky principal-agent problem is dealt with by banning payments to brokers for funneling borrowers to high-priced loans.
- Oversight at the Federal Reserve: After much fighting, the Fed is now subject to a one-time audit of all of the Fed’s emergency lending programs from the financial crisis. Moreover, within two years the Fed must disclose details of loans made to banks through its discount window as well as open market transactions. Bankers will no longer pick Fed presidents at the regional banks. Also, the Fed’s 13(3) emergency lending authority can no longer be used to aid an individual firm.
- The Financial Stability Oversight Council: This is a new 10-member bureaucracy who will monitor system-wide risks to the nation’s financial stability (which is a mandated, yet unfulfilled, job of the Federal Reserve), make recommendations to regulators, and break up cancerous financial firms. The Fed will help by supervising the largest financial firms.
- Swaps: Banks will spin off only their riskiest derivatives trading operations.
- Consumer Financial Protection Bureau: The Federal Reserve will now make rules and have power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. Autos lobbied and won an exception. What consumer uses those anyway?
- Bank Capital: Large bank holding companies can no longer spin and treat trust-preferred securities as Tier 1 capital.
- Deposit Insurance: Got more than $100,000 but less than $250,000 in the bank? Congrats! You’re insured because federal deposit insurance for banks, thrifts, and credit unions has been permanently increased to $250,000.
- Credit Rating Agencies: The abettors of the financial crisis — Fitch, S&P (NYSE: MHP), and Moody’s (NYSE: MCO) — are now going to have some oversight. A new quasi-government entity will address conflicts of interest inherent in the credit-rating business. And lawyers will be happy to know investors can sue credit-rating agencies for a “knowing or reckless” failure to conduct a reasonable investigation. Agencies are now also subject to fines and deregistration if they provide too many bad ratings.
- Hedge Funds: The party is over. Hedge funds and private equity funds are now required to register with the SEC as investment advisers and provide information on trades to help regulators monitor systemic risk. So much for cousin Vinnie’s new fund.