Obama Financial Regulatory Reform Cheat Sheet

President Obama on Friday spoke about the economy at the Celgard LLC factory in Charlotte, North Carolina.

This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

I joined CNN this morning to discuss President Obama's speech about financial regulatory reform. As expected, the President pretty much echoed the main elements of the Senate bill, which Senator Christopher Dodd is spearheading.

Barack Obama

I know regulatory reform is boooring for most people, so here are some of the essential parts of the reform process that I think are important to follow:

Derivatives: Yesterday, the Senate Agriculture Committee approved a bill to crack down on derivatives. This bill is actually more aggressive than the Dodd bill, though both require that over-the-counter derivative contracts (like the ones that brought down AIG and are at the center of the SEC's charges against Goldman Sachs) be exchange-traded in order to make them more transparent. This provision might also require commercial banks to shut down or spin-off their swaps desks. Ooops, they all just threw these operations inside the banks, so I suspect that there will be intense lobbying for exemptions, which would mean that we can expect a little watering down on the tough stance.

Resolution Authority: The President was emphatic that the bill does not institutionalize bail-outs. Yet, the Dodd Bill establishes a three bankruptcy panel, which could authorize the Treasury Secretary to appoint the FDIC as a receiver for a systemically important institution that is blowing up. Politics aside, it's clear that the bill under consideration recognizes that the government needs a better way to wind down failing institutions than were available when Lehman Brothers went south.

Bureau of Consumer Financial Protection: The Dodd Bill creates this consumer protection agency, which would be independent from, but hosted within, the Fed-don't worry, nobody else gets that decision either! The BCFP would have  broad rule-making and enforcement powers over banks and non-banks engaged in offering financial products or services that have a "material impact on a consumer".

While the House Bill would require the SEC to impose a fiduciary duty on broker-dealers providing investment advice to customers, the Dodd Bill requires the SEC to study the current standards of care and if it concludes that gaps or overlaps exist, the SEC is then required to promulgate fiduciary duty rules. In other words, Dodd passed on the "f-word".

Too Big to Fail/Volcker Rule: Here's where the reform process may have broken down. Many have suggested (and I agree) that the essential component of regulatory reform would limit the size and interconnectedness of financial firms. (See this Bill Moyers interview with James Kwak and Simon Johnson of The Baseline Scenario to understand the rationale behind the argument.)

Neither the House nor Senate versions of regulatory reform address "too big to fail." However, the Dodd Bill invokes the "Volcker Rule," which would potentially prohibit firms from participating in certain businesses, which in turn would force them to reduce their size. After completion of a study, and no later than 15 months after the Dodd Bill's enactment, the appropriate Federal banking agencies are required to issue final rules prohibiting proprietary trading, as well as investing or sponsoring hedge funds or private equity funds. Trading as part of market-making or customer facilitation (including related hedging activities) and trading or investing in government, agency and municipal securities are exempted.

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Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.
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    Jill Schlesinger, CFP®, is the Emmy-nominated, Business Analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.