Reaction to regulation

NEW YORK-On Thursday the Senate passed a bill overhauling the country's financial system-the most sweeping regulations of that sector since the Great Depression.

Praising his second major legislative victory, President Barack Obama said, "Because of financial reform, the American people will never again be asked to foot the bill for Wall Street's mistakes. There will be no more taxpayer-funded bailouts-period."

Americans for Financial Reform also applauded the passage of the bill, saying it would rein in "the unchecked speculation of the casino economy" and protect consumers from fraud by financial institutions "that siphoned billions of dollars from the pockets of middle-class families into the hands of big Wall Street banks." PICO Network, a network of progressive faith-based organizations, also praised the bill, saying it would hold financial institutions accountable and protect consumers from predatory lending.

Others, like the Mortgage Bankers Association (MBA), expressed qualified optimism. The MBA said unless House and Senate negotiations bring improvements to the final bill, it would "will only further constrain credit for borrowers, make real estate purchases more expensive, and drag out the ongoing turmoil in the real estate markets."

Kevin Hassett, director of economic policy studies at the American Enterprise Institute, disagreed with Obama that the bill would preclude the possibility of future bailouts, and said it would have a negative impact on recovery, because it would reduce risk-taking: "Precisely now we need people to be optimistic about the future and we need them to be risk-taking." The legislation's success would depend on regulators staying ahead as firms find innovative ways to do regulation. Hassett said of the regulators, "If they are able to do it effectively they'll be kind of the first ones." By identifying some firms as "too big to fail" regulaton will consolidate those firm's market power and make the economic situation more dangerous, he said.

The Senate bill would regulate derivatives-the complex financial instruments that helped spur the previous financial crisis-and require traders to trade them on an open exchange. The bill creates a watchdog group to protect consumers from predatory and abusive lending practices. It attempts to prevent firms from getting too big by limiting the amount of debt they can have versus capital. A council would monitor systemic risk. The Federal Deposit Insurance Corp. would have the power to step in to wind down a failing firm, fire a company's management, and liquidate the firm.

And in a final swat at the multimillion dollar Wall Street bonuses that outraged Americans, the bill would let shareholders have a say in executive compensation.

Financial shares ended up rising Friday with the bill's passage. The House passed financial reform in December, and the House and Senate will now negotiate to reconcile the two versions of the legislation. On Friday, Senate Banking Committee chairman Chris Dodd and House Financial Services Committee chairman Barney Frank said they expect to have a bill ready for the president to sign by July 4.