After the financial meltdown was blamed for a major part on unregulated derivatives and credit default swaps (CDS), the Democrats are pushing to pass the financial reform bill that will bring in more regulation of the financial industry. But this has become a case of easier said than done as the Republicans are firmly opposed to the bill and have blocked it from being brought on the Senate floor for debate. Senate Republicans want to add significant changes to the bill and question Democrats’ tough regulations for financial institutions.
Senator Christopher Dodd, chairman of the Senate Banking Committee, who has proposed most of the tough regulations and restrictions on financial institutions, is vocal about how the deregulation of the financial industry over the last two decades has been the prime cause of the crisis, affecting housing values, jobs and incomes all over the country.
One restriction proposed by Dodd calls for banks to trade derivatives by dividing their business into different units, each being allocated money from different sources. Derivatives are financial contracts whose value is dependent on the performance of other market instruments. They have become extremely unpopular in the aftermath of the financial crisis.
AIG’s derivatives trading caused its downfall and subsequent bail out using taxpayers’ money. Goldman Sachs is currently being sued by multiple states for betting on derivatives that went horribly wrong, worsening the sub-prime mortgage crisis.
The provisions of the proposed bill include giving the government the power to close financial institutions that are believed to be destabilizing the financial system. Consumers requiring financing will also be provided elaborate information by a new agency that will protect them from aggressive tactics of financial companies.
The bill proposes a turnaround of the banking system by moving supervision of smaller banks from under the Federal Reserve to the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency. It also intends to gives shareholders a bigger say in electing directors and deciding management compensation.
Democrats have indicated that they intend to bring the bill to the Senate floor for debate again. The overall mood in Washington is that of imposing stronger regulations on financial institutions and the public sentiment is along the same lines. But the willing lawmakers will have to cross several major political hurdles and fierce lobbying by the financial industry before the reform proposals are signed into law.