President Barack Obama and Democrats have come up with a 2,000-page rulebook for American capitalism that’ll be studied for years to come.
But some of the ramifications are already clear.
Banks will have to work a lot harder to fatten their bottom lines. High-flying – and high-risk – investments like derivatives have been somewhat curbed. But banks also won some key concessions to soften the blow at the end.
On the political side, Senate Banking Committee Chairman Chris Dodd (D-Conn.) salvaged his legacy after being cast as soft on the banking industry. House Financial Services Committee Chairman Barney Frank (D-Mass.) solidified his reputation as a whip-smart policy wonk who gets results.
And with Congress set to pass the bill next week, Obama would go 2-for-2 on history-making laws in the space of three months, following his major health care win.
Here’s the first draft of the other winners and losers in the Wall Street reform fight:
Citigroup and the business of banking
The overall thrust of financial reform has been to get the nation’s largest financial firms to back to the “basics” of banking — less betting on exotic derivatives, more providing loans for consumers and companies to speed the economic recovery.
Sen. Blanche Lincoln (D-Ark.) talked up that notion to defend her proposal to rein in derivatives swaps Friday, saying it’s “all about us getting banks back to being banks.”
This is the exact strategy Citigroup chief executive Vikram Pandit has been pursuing as he attempts to fix a bank that nearly collapsed in 2008 under the weight of its terrible market bets on real estate and other securities.
“He has been super clear: We are a customer and client driven business,” one person close to Citi said of Pandit’s strategy.
Other firms that focus on retail services, such as Bank of America and Wells Fargo, also stand to benefit from a bill that attempts to level the playing field between high-flying investment houses and brick-and-mortar banks.
Sen. Scott Brown (R-Mass.) and his Bay State banks
For a senator from the minority party who has served for all of six months, Brown influenced the bill like he was an Old Bull. He solidified his standing as the go-to Republican moderate for the Democratic leadership, a coy and intermittently frustrating but increasingly important player in Capitol Hill negotiations.
“I’m probably the deciding vote again,” he boasted in an interview Thursday with the Boston Globe.
Talk about constituent service. Brown even managed to get one over on former Fed Chairman Paul Volcker – by driving the effort to build exemptions into the Volcker Rule that helps State Street and other Massachusetts banks.
Volcker wanted to effectively ban banks from trading with their own money — because big losses could mean guaranteed taxpayer bailouts. Brown helped win the right for banks nationwide to invest three percent of their equity in hedge funds and private equity funds.
Now Ted Kennedy’s replacement is once again hinting he could bail on the bill over a $19 billion levy on the financial industry added at the last minute.
Americans do love to shop, and a key debate in the financial reform bill essentially pitted Big Retail vs. Big Banks.
Big Banks never stood a chance.
It was pure pitchfork-populism when Sen. Dick Durbin (D-Ill.) floated an amendment designed to cut down the fees merchants must pay to banks every time some swipes a debit card. The amendment will potentially cut in half the $20 billion generated annually for banks such as JPMorganChase, Citi and Bank of America.
Democrats argued that merchants could sink those savings into cheaper prices for customers or expanding their businesses.
Big retailers such as Walmart stand to save a bundle under Durbin’s amendment, which directs the Federal Reserve to set “reasonable” debit card swipe fees.
But it will also help the 7-11 franchisee and other small retailers who say they often lose money on small debit card transactions. Retailers also now can set minimum-purchase guidelines.
In other words, no more debit card swipes for a pack of Juicy Fruit.
Sen. Blanche Lincoln (D-Ark.) and her derivatives fight
Lincoln’s language might be the least understood - but one of the most important – aspects of the regulatory reform bill. Bottom line, she wanted to crack down on a $600 trillion market in these exotic, secretive and often highly risky investments.
And she mostly got what she wanted, even though the White House, Treasury, Wall Street, consumer advocates and congressional leaders never figured she’d get this far.
Step one was forcing trades into the daylight – with a plan that requires all derivatives to be cleared by a third party and traded on open exchanges.
Step two initially was a surprise – Lincoln wanted to prohibit banks from engaging in derivatives trades at all.
In the final hours Lincoln relented, but only a bit. Now banks can retain derivatives desks for many types of trades – but for the most part the traditional trades long used to hedge risk. The more complex stuff, they have to spin off to subsidiaries.
Even Democrats suspected her tough line had everything to do with Arkansas politics and her re-election fight. But she can take credit for changing the derivatives landscape.
“You got to hand it to her, because nobody wanted it to happen,” said Heather L. Slavkin, senior legal and policy adviser at the AFL-CIO, which supported Lincoln’s primary challenger.
No company in the history of the planet has been better at figuring out how to make money than Goldman. The final bill appears to aim directly at its heart. Author Michael Lewis has predicted Goldman will cease to exist in a few years.
Don’t bet on it.
If you think Goldman has a grand strategy that no one knows about to capitalize on regulatory reform, chances are you are right.
One way they might do this—though they have publicly said they have no plans to—is to drop their designation as a “bank holding company,” which they acquired at the height of the crisis. It’s a fancy way of saying they could wriggle out of some of the tough new rules in the reg reform bill – by giving up the right to get emergency loans from the government.
One problem: the Fed doesn’t like letting firms out and surely would pressure Goldman to stay.
Goldman Sachs and the rest of traditional “Wall Street”
Somewhere, Gordon Gekko is a little grumpy.
All those companies that come to mind when you think of Wall Street – or “Wall Street,” the movie – are the ones hit hardest by the bill, the international investment houses, the storied names of American finance.
These changes aren’t going to throw them into poverty overnight but will dent their bottom lines by at least 10 to 20 percent, analysts predict.
The final deals on the Volcker rule and derivatives appear to hit Goldman the hardest, with Morgan Stanley and JPMorgan Chase close behind.
Goldman had $12.78 billion in net revenue in the first quarter of this year. Of that, $10.25 billion came from trading and principal investments, the areas hit hardest by reform.
“The Wild West is ending. They are closing down the saloons and running the gamblers out of town,” said Brad Hintz, analyst at Sanford C. Bernstein and former Lehman Brothers chief financial officer.
All big banks
The bigger they are, the more they pay.
To the tune of $19 billion, the new bank levy for creating new agencies and other costs associated with Dodd-Frank. Banks with over $50 billion in assets and hedge fund firms with over $10 billion will pay based on their size.
What’s $20 billion to Wall Street? Plenty, says the Business Roundtable. “The conference report is simply too much, too broad and, in fact, endangers our entire economy,” the group said Friday.
But there is a silver lining for the banks – it’s called certainty. Financial stocks staged a big relief rally Friday after months of brutal sell-offs as banks gained a clearer picture of what’s in the measure.
“The most important thing is finally knowing what the rules of the road are actually going to be,” veteran banking analyst William Tanona of Collins Stewart said in a recent interview.
Senate Banking Committee Republicans
On health reform, Senate Minority Leader Mitch McConnell took to the floor most every day to rail against Obama’s plan. On reg reform, on the one day that mattered early on, Republicans were mute -- deciding in March to forgo a committee markup in the hopes of negotiating a compromise with Dodd before the bill hit the Senate floor.
But a comprehensive deal between Dodd and Alabama Sen. Richard Shelby, the ranking Republican, never materialized. And Republicans lost their seat as major players.
It left them only a few weeks on the Senate floor to pull the bill in their direction – instead of two chances, one in committee and one on the floor.
Sen. Bob Corker (R-Tenn.) did work closely with Sen. Mark Warner (D-Va.) on a key section on liquidating doomed firms. The final version preserved much of what they negotiated.
Some committee Republicans, including Corker, Shelby and Sen. Judd Gregg (R-N.H.), appeared to genuinely want to support a bill. But once the Dodd-Shelby talks broke down, Republicans had lost all leverage.
Fannie Mae and Freddie Mac
The decision by Democrats to punt an overhaul of mortgage giants Fannie Mae and Freddie Mac until next year sentences the already-maligned entities to many more months of public flogging.
Republicans attacked Democrats for failing to address the mortgage buyers in the bill, saying they failed to reform the lending practices at the heart of the 2008 economic crisis. The government took control of the entities in September 2008, in a move that could cost taxpayers $389 billion over the next decade.
The GOP’s relentless focus on the two massive entities – they pressed countless amendments during the two week conference committee – became as source of annoyance to Democrats.
But Republicans were serving notice to Fannie and Freddie: You’re next.
Mortgage lenders and brokers
The Wall Street bill also cracks down on mortgage lenders for the subprime mortgage meltdown, for putting people in homes they couldn’t afford and leaving them on the street when they had to foreclose.
Lenders will face new requirements to document the credit-worthiness of borrowers and will have to retain at least a 5 percent financial stake in the loans they make rather than sell them off entirely to investors. This is the so-called "skin in the game" provision.
It’s intended to counter industry practices of giving our mortgages with little or no money down, and little or nothing in the way of a credit-worthiness check. It’s a part of the Wall Street bill that will be felt most on Main Street.
TOO SOON TO TELL
There is a lot in the new bill to protect consumers from shady mortgage and credit card lenders under a powerful new watchdog agency. Brokers may also be held to a higher fiduciary standard when giving investment advice. The bill should help people from getting ripped off in important new ways.
But banks have wasted no time warning that they if they get pinched on one side by the financial reform bill – say, by a loss in debit card fees -- they’ve got to make it up somewhere else.
And already they’re warning that could be consumers.
Banks are saying that could come in the form of new account fees or balance minimums. And some banks have already said the notion of “free checking” – open an account for no monthly maintenance cost – may soon be a thing of the past for low-dollar savers.