Senate Passes More Reform – This Time, It’s Financial Reform

In what has become a disturbing trend, the Senate once again rushed to a final vote on another massive reform package last week. This time, though, the Bill was not as well-publicized as the health care bill from this winter. This time, the financial industry was in the crosshairs of Obama’s “change” pledge.

The Restoring American Financial Stability Act of 2010 (the Act) was passed despite hundreds of amendments that were still pending. The Bill also passed despite the fact that many Senators had NOT EVEN READ IT. This sort of action should not surprise us, because this is exactly the same pattern that was used to pass health care reform earlier this year. Just another day in Washington.

So what does the Act do? The primary goal of the Act is to increase federal regulation of nonconventional investments. A simple way to describe nonconventional investment is to think of them as anything other than stocks, bonds, or money funds that are traded on the open market. Two major types of nonconventional investments are derivatives and hedge funds.

The government is proposing to step up regulation of these types of investments in hopes of avoiding another situation like we had last summer when banks failed and investment companies went bankrupt due partly to reliance on these nonconventional (and highly volatile) investments. These problems, along with the housing crisis, were at the heart of the economic troubles that the country is still feeling today.

President Obama has claimed that the Act will mean that “taxpayers will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts.”

But wait - wasn’t it Obama that gave all of those bailouts just last year?!?!?!? But I digress.

Perhaps the most significant provision of the Act provides a new way for failing banks to liquidate, similar to a bankruptcy process that a normal business would go through. The Act provides the SEC with the ability to regulate derivative markets. The Act also requires SEC registration of hedge funds. That’s a lot of regulation and government oversight, but no substantive changes to the system.

Other provisions of the Act continue this trend, creating new government agencies tasked with monitoring various sectors of the financial markets. The Act also streamlines the supervision of the banking industry, dividing oversight among agencies based on the size of the institution.

Critics argue that the Act is too strong on regulation and too weak on actual changes to the Wall Street systems that caused the problems in the first place. Rather than give banks a different process to go through when they fail, why not do something that would prevent them from failing in the first place?

Critics also argue that the Act does not prevent banks from combining their commercial banking and investment banking operations. This, they argue, continues to subject commercial deposits to investment risk and could leave banks with insufficient assets to cover their deposits.

In the end, only time will tell whether this Act is as good as its supporters think or a flawed as its detractors view it to be. It is also important to note that the Act, though passed by the Senate, may not be in its final form since it still has to be reconciled in Joint Committee with the House version.

As a CPA in tax practice, I can tell you one thing for sure: get ready – once again – to pay higher taxes to fund all of this new government that is being established.