But perhaps the worst fallout, from Wall Street’s perspective, is the public relations one.
Two weeks into deliberation over a package of sweeping financial reforms, the Senate has approved major items such as too-big-to-fail authority, Federal Reserve audits and larger capital requirements for banks, but major battles still loom over the powers of a new consumer financial protection agency and regulation of over-the counter derivatives.
Senate Democrats are trying to push through a bill, known as The Wall Street Reform Act, as soon as possible to catch up to the efforts of the House, which approved its version of financial reform late last year.
The President has said he wants to sign a compromise measure into law by Memorial Day weekend, but Congressional sources say sometime closer to the Fourth of July now looks more realistic.
Here’s a scorecard of major measures in the legislation, which runs well over 1,500 pages, as well as notable amendments.
In Or Out
First and foremost is the creation of new authority for the federal government to intervene in the affairs of struggling financial giants and, if necessary, wind down their business in an orderly fashion to protect the overall financial system.
Senate Banking Chairman Chris Dodd (D-Conn.) has called this the single-most important area of his bill, which covers eight important areas of reform.
Several amendments or changes to the original proposals covering this "too big to fail" issue have been approved and integrated:
Another amendment that would essentially limit the size of commercial banks by creating a firm cap on their share of insured deposits at 10 percent failed to win enough votes.
In a move related to the too-big-to-fail crackdown, an amendment authorizing regular and special retroactive audits of the Fed’s balance sheet was approved, addressing Congressional concerns about the central bank’s role in the rescue of AIG , Citigroup , Bank of America , Bear Stearns and others.
One area that was barely touched was reform of Fannie Mae and Freddie Mac , the two failing mortgage giants taken over by the government in late 2008.
An amendment that would force the government to put them in receivership was defeated, while one that mandates a study of the problem was approved.
The Senate also approved amendments that would require the biggest banks to set aside more capital to boost their stability—capital requirements would rise as firms grow in size or engage in riskier lending practices—and make them pay more for deposit insurance while smaller banks pay less.
Credit agencies were also hit with a reform measure, wherein the government would set up a clearinghouse to match rating agencies on a semi-random basis with debt issuers. (Read more here)
On the consumer side, one key amendment was approved. It would limit fees charged on credit and debit card transactions, building on the new and improved protections under last year's Credit Card Reform Act.
Still To Come
The big battleground in the consumer area is the creation of a powerful regulator to protect consumers from potential abuse by financial services companies, especially in the area of mortgages.
As proposed by Dodd, the Consumer Financial Protection Bureau, would be an independent agency housed at the Federal Reserve with a presidentially appointed director, rule-making, examination and enforcement powers.
A Republican alternative would make it a council with fewer and lesser powers. In addition, one amendment bound to provoke heated debate would exempt auto companies from its jurisdiction.
Derivatives regulation has already been a divisive issue and will continue to be so when it comes up for consideration, probably in the coming week.
A compromise proposal by Dodd and Sen. Blanche Lincoln (D-Ark.), chair of the Agriculture Committee—which has overlapping jurisdiction in the area, would force banks to create special subsidiaries for swaps operations with their own capital requirements. Such a measure does not exist in the House bill and Democrats and Republicans alike are divided over it.
Another key component—creating an over-the-counter trading and settlement system—has fairly broad support, but some would like a strong end-user exemption for companies that use derivatives as an operational hedge.
In addition, a somewhat related amendment would essentially make the so-called Volcker rule legal, thus restricting the proprietary trading activities of Wall Street firms, an issue that has flared brightly with the recent allegations about Goldman Sachs . President Obama is a strong supporter of the rule, while the GOP generally opposes it.
Well over 300 amendments to the reform bill have been filed, but most of them won't get to the vote stage. The Democratic leadership is trying to streamline the legislative process to hasten a final vote, as well as preserve as much of the original Dodd version as possible.
Passage is almost assured, especially if the bill contains enough compromise measures to attract the support of a few moderate Republicans, should 60 votes be needed.