WASHINGTON - The toughest financial regulations since the Great Depression are headed for final votes in Congress next week, covering everything from debit card swipes at Starbucks to the most complex securities, in an election-year salve for public anger over the Wall Street risk-taking that cost millions their jobs, homes and nest eggs.
The legislation creates a new federal agency to police consumer lending, set up a warning system for financial risks, force failing firms to liquidate, and map new rules for instruments that have been largely uncontrolled.
House and Senate bargainers approved the deal as the sun rose Friday, giving President Barack Obama a fresh campaign-season triumph after his health care overhaul - and an achievement to tout at the weekend global economic summit in Toronto. Democrats hope lawmakers can pass the legislation and ship it to Obama for his signature by July 4, capping a burst of action prompted by the worst recession in seven decades.
Leaving the White House for Toronto, Obama said the package will "help prevent another financial crisis like the one that we're still recovering from." Financial analysts, however, gave it mixed reviews. Some said banks would simply find new ways to make money by getting around the rules and establishing new fees.
While reining in banks and setting new rules for high finance, the legislation also reaches down to some of the most commonplace consumer transactions.
The Federal Reserve will have to set new limits on the fees banks charge merchants who accept debit cards. Retailers, who would stand to save billions in payments, would be able to offer customers reduced prices for debit card use. Banks said the limits could simply shift costs to other banking products.
Lenders would no longer be able to make a loan without verifying that the borrower can repay it. They would have to disclose the maximum amount that borrowers could pay on adjustable-rate mortgages.
Aside from the sweep of the legislation, the agreement gives the president another signature achievement just three months after he pushed a reshaping of the nation's health care system through Congress. With deep public hostility toward Wall Street and the government bailouts that helped rescue them - an Associated Press-GfK Poll this month found that 79 percent blame banks and lenders for the economic problems - Democrats can only hope the measure will help them cling to their congressional majorities in the November elections.
The legislation was not without its critics. Republicans complained that it ignored their efforts to impose tighter restrictions on Fannie Mae and Freddie Mac, the mortgage giants who have benefited from huge federal bailouts and whose questionable lending helped trigger the housing and economic meltdowns.
In the AP-GfK Poll, seven in 10 also blamed lax federal regulation for the recession, six in 10 blamed people who couldn't afford their loans, and nearly two-thirds doubted the legislation would ward off a future downturn.
THE NEW RULES
OVERSIGHT. A 10-member council would monitor threats to the financial system and decide which companies were so big or interconnected that their failures could upend the financial system. Those companies would be subject to tougher regulation or closure, with a tax on the banking industry covering the costs.
CONSUMER PROTECTION. A new independent office in the Federal Reserve would oversee financial products and services such as mortgages, credit cards and short-term loans. New on-site examiners would enforce the rules. State consumer laws, some of which are tougher than federal laws, would apply to financial companies - unless federal regulators blocked them individually.
FEDERAL RESERVE. The Federal Reserve would continue supervising two types of financial companies: bank-holding companies and state-chartered banks that are members of the Fed system. The Fed would lead oversight of big, interconnected companies whose failures could threaten the system. The Fed's relationships with banks would face more scrutiny from the Government Accountability Office, Congress' investigative arm.
MORTGAGE LOANS. Lenders would be required to obtain proof from borrowers that they can pay for their mortgages. They would have to provide evidence of their income, either though tax returns, payroll receipts or bank documents. That provision seeks to eliminate so-called stated-income loans where borrowers offered no proof of their ability to make payments. Lenders would have to disclose the maximum amount that borrowers could pay on adjustable-rate mortgages; lenders are barred from receiving incentives to push people into high-priced loans.
DERIVATIVES. These are financial instruments whose values change based on the price of some underlying investment. They were used for speculation, fueling the financial crisis, and they were traded out of the sight of regulators. The new law would force many of those trades onto more transparent exchanges. Banks will continue trading derivatives related to interest rates, foreign exchanges, gold and silver. But riskier derivatives - such as those based on mortgages - could not be traded by banks but through affiliated companies with segregated finances. Government bailouts for banks that face big losses on derivatives are banned.
CAPITAL CUSHIONS. Big banks would have to reserve more money to protect against future losses. The standards would be as high as those for small banks. Certain hybrid securities would cease to count as a key measure of a bank's strength. Banks would have to find other capital to replace them. Would not apply to banks with under $15 billion in assets that already hold such securities.
BANK RESTRICTIONS. Bank holding companies with commercial banking operations would not be permitted to trade in speculative investments. However, bank holding companies will be allowed to invest up to 3 percent of their capital in private equity and hedge funds.
EXECUTIVE PAY. Shareholders would have the right to cast nonbinding votes on executive pay packages. The Fed would set standards on excessive compensation that would be deemed an unsafe and unsound for banks.
RATINGS AGENCIES. They would have to register with the Securities and Exchange Commission and would face increased liability standards. The Securities and Exchange Commission would have to study whether to change the long-standing practice where banks select and pay ratings agencies to rate their new offerings. - AP