Last night the Senate passed its financial overhaul package, the Restoring American Financial Stability Act of 2010 (SB 3217), by a 59-39 vote, paving the way for the biggest restructuring of our financial system since the Great Depression. The House passed its version of the financial overhaul (HR 4173) back in November. The legislation must now head to a conference committee for the two houses to reconcile their differences, and the reconciliation bill must be passed by both houses and signed by President Obama before becoming law.

The major provisions in the Senate Bill include the following:

  • Gives federal regulators new authority to seize and break up troubled financial firms without taxpayer bailouts where the firm's collapse could destabilize the financial system
  • Creates a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking authority and some enforcement powers over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans
  • Requires that the majority of all derivatives trading be executed on a public exchange and mandates that any large commercial banks that have access to the Federal Reserve's discount window divest their derivatives trading business to separate companies
  • Establishes a new, 9-member Financial Stability Oversight Council, composed of existing regulators to monitor and address system-wide risks to the country's financial stability
  • Eliminates the Office of Thrift Supervision (OTS)
  • Retains the Federal Reserve's oversight of community banks and also empowers the Federal Reserve with supervisory powers over the largest, most complex financial companies
  • Requires a one-time government audit of all of the Federal Reserves emergency lending programs since December, 2007
  • Increases the capital requirements for banks with more than $250 billion in assets based on higher-risk and size
  • Requires firms that securitize mortgages and other loans to hold a portion of the risk on their balance sheets, but would exempt regulator-defined less-risky mortgage products
  • Requires hedge funds that manage more than $100 million to register with the SEC
  • Establishes a new self-regulatory organization for credit rating agencies created to eliminate conflicts in the current system where an institution pays for its rating  

There are still major differences between the House and Senate bills. In connection with the Consumer Financial Protection Bureau, the House wants it to be a stand-alone agency, not housed within the Federal Reserve, and wants it to have greater powers and latitude to implement regulations. In addition, while the House bill exempts auto dealers from the supervision of the Bureau, the Senate bill would regulate them.

In connection with derivatives, the House bill would not require banks to spin off of their lucrative derivatives business. The House bill, in contrast to the Senate bill, also would not prohibit banks from proprietary trading that is, trading for their own account

This alert provides a quick summary of the Senate action. A more comprehensive analysis of the regulatory changes and anticipated reconciliation issues between the two houses will be forthcoming shortly'