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Wall Street Reform: The Good, the Meh, and the Ugly

After watching our economy get rocked by the recent financial crisis, we Fools are not the only ones that are eager to see strong, comprehensive financial reform.

So how did the Senate do? There's a lot of confusion out there about that, but we've been following this issue from the start. Here's our Foolish summary of the most important parts of the recently approved Senate bill.


Shareholder Bill of Rights
In the lead-up to the financial crisis, executives paid themselves hundreds of millions of dollars for record profits fueled by record risk-taking. When their companies exploded, they walked away with still more money in severance. Boards of directors that were supposed to represent shareholders failed in their responsibility to oversee management and monitor risk. The Shareholder Bill of Rights seeks to make boards more accountable to shareholders and less beholden to management.

  • The Senate bill incorporates a version of The Shareholder Bill of Rights that we wrote about last October, and again in our testimony before a House Financial Services Subcommittee last month.
  • A few of the provisions include providing shareholders a non-binding say on executive pay, introducing clawbacks for executive pay if management violates securities laws, and giving shareholders the right to run their own candidates for the board against management's candidates (cough, lackeys, cough).

Ratings Agencies
If ever there was functional alchemy, it came when investment bankers were able to take laughably ill-advised mortgage loans and package them into AAA-rated securities. While some of it may have involved sleight-of-hand by the bankers, the cartel of major rating agencies -- which includes Moody's (NYSE: MCO  ) , Standard & Poor's, and Fitch -- didn't have much incentive to get tough on these screwy concoctions, after all, the banks were the ones that signed the rating agencies' checks.

Late-breaking amendments to the Senate's bill would go a long way toward fixing this problem.

  • One amendment would remove federal regulations that require the use of rating agencies. That way when rating agencies are used, they will be used based on a market need, rather than government mandates. What a concept!
  • A second amendment would create a central clearinghouse that would assign a rater to each deal. That would prevent issuers from shopping around for the lowest rating standards.

Currently, the five largest derivatives dealers -- Goldman Sachs (NYSE: GS  ) , Morgan Stanley (NYSE: MS  ) , JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Bank of America (NYSE: BAC  ) -- control 97% of the industry's notional derivatives exposure and are able to conduct very lucrative business behind closed doors.

This privileged banking bloc also isn't necessarily required to post collateral on these positions. That potentially allows them to bite off way more than they can chew -- AIG anyone?

  • The Senate bill would require the vast majority of derivatives to trade on exchanges to increase competition and pricing transparency.
  • It also requires parties to post collateral to a central clearinghouse, which would help prevent the next AIG-like disaster, where a dealer makes commitments it can't uphold.
  • Section 716 of the bill would specifically ban federal assistance (such as the FDIC or Fed) to any swaps dealers. That would force banks to either spin off their swaps trading desks or support them with their own capital, rather than using government-subsidized capital.


Volcker Rule
Here's a truly no-brainer idea: banks that have access to taxpayer support through the Federal Reserve and FDIC insurance shouldn't be allowed to engage in risky proprietary trading. Named for former Fed Chairman Paul Volcker, the "Volcker rule" would drastically ratchet down risk in the banking system.

  • An amendment introduced by Jeff Merkley and Carl Levin would have directly implemented the Volcker rule. Unfortunately, the amendment was blocked from ever even getting to a vote, despite the fact that it had enough support to pass.
  • What we're left with is a study by the Comptroller General that has the option of eventually recommending that the rule be implemented. Sounds to us like they're putting the rule in a dark room where it can be killed quietly or given tons of regulatory "discretion."

Consumer Financial Protection Bureau
Overlapping bureaucratic agencies are a great way to maximize regulatory fumbles. By creating a single watchdog for financial products, the financial reform bill hopes to prevent consumers from getting caught up in predatory, ill-advised, or just plain crazy mortgages or other financial products in the future.

  • The Senate bill would create an agency with independent leadership and rule-writing and enforcement authority that will be able to look out for consumer abuses.
  • However, a boneheaded provision foolishly (that's a small 'f' there) gives a council of bank-friendly regulators the power to veto things the agency does.

Capital Requirements
Allowing financial firms to lever themselves to 30-to-1 is asking for trouble. In 2004, regulators granted a special exemption to Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs so they could pile up more debt to help them juice their returns. Without hard capital requirements written into law, regulators could have the ability to issue similar wacky loopholes and exemptions in the future.

  • The reform bill doesn't include any hard capital requirements for banks.
  • However, an amendment by Susan Collins would require the largest banks to meet requirements at least as strong as smaller banks. But don't get too excited, Wall Street -- and the Treasury for that matter -- will be bringing out the big guns to fight this one.


Too Big to Fail
Does anyone still want to argue that Bank of America, Citigroup, JPMorgan, Goldman Sachs, Morgan Stanley, and Well Fargo (NYSE: WFC  ) aren't too big to fail? Heck, a few of these behemoths have gotten even larger through acquisitions during the crisis. All together, these six companies now control assets worth 63% of the entire economic output of the United States. It would seem that making sure that banks are no longer big enough to be considered too big to fail would be a crucial piece of financial reform. It isn't.

  • The SAFE Banking Act amendment, which was introduced in the Senate, would have forced the largest too-big-to-fail banks to shrink from the $700 billion to $2 trillion range to the $300 to $400 billion range. That was summarily voted down.
  • Other amendments, including one that would have reinstated Glass-Steagall, never even made it to a vote in the Senate.

"If you talk to anyone privately, there's a sigh of relief."
That's an anonymous veteran investment banker quoted in The New York Times yesterday. Despite contributing to a crisis that cost our country over 10 million jobs and doubled our national debt, Wall Street banks are getting off pretty darn easy with this reform bill.

Over the coming days, Congress is going to decide what gets in the final bill, and what doesn't. They know Americans are upset, and, with elections coming up, they are very sensitive right now to what we think. If you care about preventing the next crisis, don't just stew in the comments section of this article -- let our representatives know what we need.

We made our voices heard by calling all eight numbers below -- it only took eight minutes. If you've never called before, it's really easy. We dialed, someone answered the phone, and we told them that we wanted to comment on the financial reform bill making its way to conference committee. We let them know that to stand a chance at preventing the next financial crisis, it's really important for the Senator and Representative to make sure that the final bill includes loophole-free clearing and exchanges for derivatives, the section 716 of the Senate’s bill, a strong Volcker rule, and hard capital requirements.

This is our chance, Fools. Let’s get it done.

Rep. Barney Frank, (202) 225-5931
Sen. Chris Dodd, (202) 224-2823
Sen. Blanche Lincoln, (202) 224-4843
Sen. Harry Reid, (202) 224-3542
Rep. Nancy Pelosi, (202) 225-4965
Sen. Richard Shelby, (202) 224-5744
Rep. Spencer Bachus, (202) 225-4921
Sen. Saxby Chambliss, (202) 224-3521

Ilan Moscovitz and Matt Koppenheffer don't have an interest in any companies mentioned. The Motley Fool is investors writing for investors.

Read/Post Comments (35) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 24, 2010, at 5:31 PM, JustinSeine wrote:

    MESSAGE TO CONGRESS: STOP STEALING FROM US - Directly and Indirectly! - Think about what you are doing to this country! STOP LEASING THE KEYS TO THE TREASURY TO THE HIGHEST BIDDERS! STOP! STOP! STOP!

    On this Memorial Day please stop to think about all our brave soldiers and sailors who gave their lives to protect OUR freedoms. They did not give their lives so that you can sell us all out to highest bidder! Get a consience or get lost! (pass it on)!

  • Report this Comment On May 24, 2010, at 5:40 PM, Scoot411 wrote:

    Yeah, call your local Liberal and tell them to screw the financial industry even more!!!!

  • Report this Comment On May 24, 2010, at 5:44 PM, DaisyQt wrote:

    thank you for this article, especially appreciative of the telephone numbers which gave me direct access to the committee

  • Report this Comment On May 24, 2010, at 5:57 PM, Overstock wrote:

    Scoot411 - since when does making the financial industry accountable count as being "liberal"? I guess the implication is that a sleazy, back-room make-my-own-rules and screw-the-shareholder financial industry is solid plank in a conservative platform?

    Everyone is rippin' mad about how the economy of the last decade was built more like a bomb than a bridge, but it seems all the anger is getting directed at everyone except those who profited most by it....the dumbing down of this country is almost complete.

  • Report this Comment On May 24, 2010, at 6:02 PM, TMFKopp wrote:


    "Yeah, call your local Liberal and tell them to screw the financial industry even more!!!!"

    Curious that this is a popular reaction. And what's funny to me is that this has gotten any traction outside of Wall Street. It seems as if Wall Street and its backers in Washington have done a really fantastic job at convincing many Average Joes around the country that cracking down on Wall Street is somehow going to be bad for them. Kudos to them for the bang-up marketing.

    The fact is that letting Wall Street continue to run amok is great for Wall Street and anyone that collects a check from Wall Street -- they'll be paid handsomely and get to ride off into the sunset if everything goes wrong again (that's if they don't try to convince us all over again that it's not their fault and the crazy cowboy stuff that they're doing is absolutely necessary). Meanwhile, the "real" economy that the rest of the U.S. relies on will be thrown into turmoil all over again.

    But I'm not a cold person. I'll go out and buy the smallest violin in the world and play a sad little tune for Wall Street.


  • Report this Comment On May 24, 2010, at 6:33 PM, mtracy9 wrote:

    The right-wingers on this site want to blame liberals for the financial meltdown, in a classic case of scapegoating. In fact, the charge for deregulation (the main culprit for the meltdown) was led by right-wingers in Congress, like Phil Graham, going all the way back to the early 1980s, and to their hero Ronnie Reagan. Reagan's deregulation led directly to the S&L debacle, and was a precursor for things to come.

  • Report this Comment On May 24, 2010, at 6:40 PM, rd80 wrote:

    Nice article, but you missed the biggest 'UGLY' in the package.

    The bill does absolutely nothing about two major contributors to the crisis and what will certainly be the two most expensive parts of the bailout program - Fannie and Freddie.

  • Report this Comment On May 24, 2010, at 6:53 PM, TMFKopp wrote:


    "The bill does absolutely nothing about two major contributors to the crisis and what will certainly be the two most expensive parts of the bailout program - Fannie and Freddie."

    Great point and it's certainly not something that Ilan and I overlooked.

    Fannie and Freddie are a massive quagmire all of their own. My wish is that these two train wrecks were included initially in the serious "what should we do" discussions. Instead they primarily came up in the form of posturing on both sides.

    I think we can blame the Dems for using stall tactics when it comes to Fannie and Freddie. It seems to me that they'd like to sweep the problem under the bed and let it keep on being a problem. The Republicans aren't blameless though, as they've largely made outlandish proposals about Fannie and Freddie that were sure to create deadlock rather than try to come up with workable plans.

    This is clearly the next big task for Congress because we're in trouble if these financial nukes are left to continue as is. Hopefully they don't get the same treatment that Social Security and Medicare have gotten (which is basically no treatment at all except for endless posturing).

    But as far as the financial reform bill, at this point I'm not going to complain that Fannie and Freddie aren't in it -- to put them in late in the game would have served only to hold everything else up, and politics being politics, I feel like you have to grab the small victories (hopefully derivatives, capital requirements, shareholder bill of rights, and rating agencies) where you can.

    But yeah, I'm definitely on board with you that Fannie and Freddie MUST be addressed.


  • Report this Comment On May 24, 2010, at 6:57 PM, maggiedad222 wrote:

    until we all take the pledge and refuse to vote for ANY incumbent, we will be stuck with what we have.

  • Report this Comment On May 24, 2010, at 7:10 PM, richsue3 wrote:

    Don't bother calling these numbers - They won't listen anyway. They haven't over the last 4 years.

    Bill will pass doing nothing to protect the consumer except to literally KNOW everyone's account numbers and transactions taking place in them.

    This is a political ploy being forced on us before Novermber electtions so those encumbents can look as if they are doingsomething for the American public.

  • Report this Comment On May 24, 2010, at 7:13 PM, JustinSeine wrote:

    It appears to me that the masses are far too interested in fixing blame and far too disinterested in fixing the problem. That, is the problem!

  • Report this Comment On May 24, 2010, at 7:24 PM, Sail285 wrote:

    Our "friends" in Washington are doing their usual, sell out to the highes bidder(s). Of course the highest bidders have all of our money and they have millions to spend - The Wall Street Bankers.

    I called Harry Reid and Blanche Lincoln. The "reform" has already been made much too weak by failing to reinstate the Glass-Steagall Act and provision to get rid of "Too Big To Fail". The least they can do is make the remaining provisions as strong as possible in favor of protecting the US citizens and our economy.

  • Report this Comment On May 24, 2010, at 7:27 PM, JustinSeine wrote:

    I agree with maggiedad222 100%. If you vote for an incumbent you are accepting the status quo. You ar essentially articulating that you "Like things the way that they are". One having such an opinion/attitude is either part of the problem or a "I'll vote for him cuz he's cute" IDIOT!

  • Report this Comment On May 24, 2010, at 7:33 PM, jwe3 wrote:

    Arrrggggghhhhh. You get to the end and see that the numbers to call are to the cretins who are so responsible for setting up the disaster in the first !@#$%^& place. Check out the You Tubes of these people ripping the W administration's reps testifying that the bad practices needed to be reigned in. These are the very people who had the opportunity to cause the brakes to be applied but instead let the system drive right off the financial cliff. Do you really think calling them now will help? OTOH, it is great that you at TMF were allowed to put in your observations and recs. Too bad for all of us that those guys will likely set up more wrecks. :-(

  • Report this Comment On May 24, 2010, at 7:34 PM, JustinSeine wrote:

    If I get mugged in Central Park, I lose my wallet and my watch. I do not have to pay for the mugger's health insurance, retirement, airfare, meals, alcohol, recretional companionship, golf outings.... and on and on and on....

    I'd rather get mugged by a legitimate thief rather than a pack of professional phonies!!!!!

  • Report this Comment On May 24, 2010, at 7:57 PM, pianofritz50 wrote:

    Oh yeah, let's see: Rep. Barney Frank, Sen. Chris Dodd, Sen. Harry Reid, & Rep. Nancy Pelosi

    Aren't these the one's who pushed Fannie Mae & Freddy Mac to loan money to those who should NOT have been buying homes... aka they couldn't afford them??

    Yep, watch this YouTube video for their part in the "blow-up"

    And this time, they'll fix it??!! Yeah, right...

  • Report this Comment On May 24, 2010, at 8:02 PM, JustinSeine wrote:

    The trough runs wide and the trough runs deep! It can adaquately feed 535 at a single sitting!

  • Report this Comment On May 24, 2010, at 8:04 PM, kyddfool wrote:

    Ok, are young, smart and certainly

    " foolish"........just remember this one thing. To change things we have to ( change people); and the only way to do that is to vote these monkeys out of congress- every single time; every single primary. Then, we have a chance to a new day. It's the only option we long as they are there, they have control - whatever we write to whomever we do......they are already bought and paid for.

  • Report this Comment On May 24, 2010, at 8:31 PM, JustinSeine wrote:

    Isn't it great? We have a serious topic that can and will have an impact on millions of American lives and in comes a piece of human waste trying to sell us shoes! This bottom feeder's teeth and a ballpean hammer are destined to meet! If you want to buy a handbag from a scumbag go to and get screwed again!

  • Report this Comment On May 24, 2010, at 8:50 PM, curtwolters wrote:

    "SENATORS for sale or rent;

    REPRESENTATIVES fifty cents ..."

    With a 'thank you' nod to Roger Miller, 1970

  • Report this Comment On May 24, 2010, at 8:55 PM, MyDonkey wrote:

    To summarize the "financial reform" results in layman's terms:

    1. big bankers drive away in tractor-trailers full of prime rib steaks

    2. idiot citizens who still think there's a difference between Republican/Democrat get thrown a few bones with which to beat each other over the head

    3. investors scavenge a couple of pieces of gristle to gnaw on until their bellies start grumbling again

    4. all remaining taxpayers who aren't invested in the stock market get nothing -- not even a guarantee they won't get robbed again

    There's only one real political party in this country. It's called the Money Party. The job of Money Party politicians (as dictated by Big Business) is to accept million$ in lobbyist bribes in exchange for billion$ worth of contracts, favors, subsidies, bailouts, banker-friendly laws, convenient loopholes, and lax enforcement of regulations.

    The plan is working to perfection. There's no point in contacting your Money Party representative unless you're also sending money (and lots of it), so don't waste your breath.

    And "voting the incumbents out" won't work either, because their Money Party replacements will be (or become) equally corrupt and beholden to their corporate masters. That's the nature of politics.

    Only widespread strikes and country-wide street protests are capable of getting the masters' attention, and we're not close to that point yet.

  • Report this Comment On May 24, 2010, at 9:30 PM, TMFDiogenes wrote:

    Thanks for reading everyone, and to Daisy for calling already!

    I'm calling all eight of the people tomorrow morning. With elections coming up, Congress is VERY sensitive to phone calls right now. They know Americans aren't happy that Wall Street blew up our economy and Washington looked the other way.

    In the coming days, this bill is going to conference committee, where they will decide what's going to be in the final bill. If you care about preventing the next financial crisis, don't just stew in the comments -- tell some or all of these eight people that we need loophole-free clearing and exchanges for derivatives and section 716, a strong Volcker rule, and tough capital requirements for banks.


  • Report this Comment On May 24, 2010, at 10:00 PM, i4fatpitch wrote:

    lIan and Matt - Thanks for this informative article. I have been wondering what exactly was included in the senate bill. The most disheartening part for me is that some Glass-Steagall like reform, which would separate investment and commercial banking activities and their associated risks is not in the bill.

    I am in favor of letting the investment banks take as much risk as they want to, but I think it is important to keep these risks separated from other essential banking activities so that if they lose, they and their investors go down in flames without taking the rest of the economy with them.

  • Report this Comment On May 25, 2010, at 3:09 AM, Floorhead wrote:

    Good article excpet the part about derivatives. Making companies post collateral on derivatives means that many of them will not be able to hedge risks such as currency exchange rates and interest rates. Are you aware that non-bank corporations are pteitioning against this?? Many OTC structured derivatives are bespoke and cannot be put on an exchange anyway.

  • Report this Comment On May 25, 2010, at 9:56 AM, BMFPitt wrote:

    1. Without the Volker Rule, this is useless window-dressing.

    2. Even with the Volker Rule, Congress can never be trusted to not do bailouts, which were never legal to begin with.

    3. Consumers don't need to be protected from themselves, taxpayers need to be protected from paying for the mistakes of banks and consumers.

  • Report this Comment On May 25, 2010, at 11:18 AM, Baaab wrote:

    I emailed all of the Senators and Representatives above, saying "Concerning the financial reform bill currently in conference: To stand a chance at preventing the next financial crisis, it's really important for the Senator and Representative to make sure that the final bill includes loophole-free clearing and exchanges for derivatives, the section 716 of the Senate’s bill, a strong Volcker rule, and hard capital requirements"

  • Report this Comment On May 25, 2010, at 3:21 PM, steveelcpo wrote:

    And after you call them and tell them what we want, vote Frank, Reid and Pelosi out of office in November for allowing this to happen in the first place.

  • Report this Comment On May 25, 2010, at 3:48 PM, BMFPitt wrote:


    Why stop there?

  • Report this Comment On May 25, 2010, at 5:41 PM, TMFDiogenes wrote:

    Thanks for emailing Baaab!

    Let's keep up the pressure, everyone!

  • Report this Comment On May 26, 2010, at 9:19 AM, Doris411 wrote:

    Better something imperfect than nothing at all. Fannie and Freddie need to be fixed, but separating the two problems makes sense.

    Personally, I think both Glass-Steagall and usury laws should be reinstated. If credit card and payday loan companies couldn't charge such outrageous rates, they'd have to be more careful in their underwriting. Not only would borrowers not end up paying more in interest than the original principal, but they would only be allowed to borrow what they had some reasonable hope of repaying.

    I believe national usury laws would be justifiable under the interstate commerce clause. Then the companies couldn't just shop for the state with the most lax regulation, as they have in the past.

  • Report this Comment On May 26, 2010, at 10:18 AM, EllenBrandtPhD wrote:

    Do brokerages' proprietary trading floors trade against their firms' own customers? Or worse? Readers might be interested in "My Life Versus Mrs. Blankfein's Diamond Earrings"

  • Report this Comment On May 26, 2010, at 1:25 PM, lfjord wrote:

    Just called the offices listed above, and it was quick and easy. Most just want your zip code, and since this might be considered a tip of the hat about one's political affiliation, I mentioned that belonging to Motley Fool more strongly influenced me about financial issues than my geography. So, thank you for helping with citizen democracy...

  • Report this Comment On May 26, 2010, at 4:38 PM, TMFDiogenes wrote:

    Nice work, Ifjord! Thanks for the hat-tip!

  • Report this Comment On May 28, 2010, at 12:32 AM, masterN17 wrote:

    Apologies for link plugging, but I just received a response from Dianne Feinstein (or someone from her office) regarding her no-vote on the SAFE amendment.

  • Report this Comment On May 28, 2010, at 8:08 PM, rrwillis wrote:

    Until a majority of Americans are willing to vote against people who support the status quo and for people who want to see real change, the system will never get any better.

    If neither democrats nor republicans support true reform, then the only choice is to cast a protest vote in favor of a minor party or independent.

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