As the following chart demonstrates, H.R. 4173, the Wall Street Reform and Consumer Protection Act, addresses some of the most egregious problems raised by the Lehman Brothers’ failure, which precipitated the costly taxpayer bailout put forward by President Bush in 2008. For a more complete analysis of how the Republican substitute makes taxpayer bailouts more likely, click here.
House Wall Street Reform Legislation Addresses Problems Raised by Lehman Failure
Problem
H.R. 4173
Republican “Substitute”
No mechanism to wind down and break up large, interconnected institutions in an orderly fashion
Ends taxpayer bailouts
Creates comprehensive orderly dissolution regime for large, interconnected firms;
Protects taxpayers by requiring costs to be borne by industry, creditors and shareholders, and management
Directs regulators to take steps to control risks and break up firms before they become too large, interconnected, concentrated, or risky
Relies on changes to the Bankruptcy Code, which could lead to systemic disruption and uncertainty within the markets
Minimal regulation of investment bank holding companies
Strong, consolidated supervision of interconnected firms, including investment bank holding companies
No provision
No mechanism to identify and address systemic risks (firm specific or activity specific)
Consolidated supervision of systemically important financial services holding companies;
Creates Systemic Risk Council to monitor the financial system for potential risks;
Facilitates communication among Council members to enhance overall knowledge of the markets;
Requires analysis of both firms and activities for potential risk
A Markets Stability and Capital Adequacy Board gathers data and reports to Congress and functional regulators;
No provision for consolidated supervisor
Risky, undetected off- balance sheet exposures
Requires the computation of capital requirements for large, interconnected firms to take into account the off-balance sheet activities of the company (Fed authority to exempt a company or certain of its transactions)
No provision
Insufficient regulation of OTC Derivatives
Registration of swap dealers and major swap participants;
Required clearing and trading of certain swaps;
Reporting of all swap transactions;
Regulators must set capital and margin; requirements for swap dealers and major swap participants;
Regulators may remove end user exemption if systemically risky counterparty exposure is created
No mandatory clearing or trading requirements;
Focuses on reporting of swap data
Does require regulators to set margin requirements
Excessive compensation rewarding risky behavior
Gives shareholders a “say on pay” – an annual, non-binding, advisory vote on pay practices including executive compensation and golden parachutes;
Enables regulators to ban inappropriate or imprudently risky compensation practices;
Requires financial firms with more than $1 billion in assets to disclose any compensation structures that include incentive-based elements.
Agrees with Democrats for a non-binding “say on pay,” but requires a vote only once every three years;
No provisions to allow regulators to address risky, incentive-based compensation structures
Credit Rating Agencies’ methodologies failed to identify key risks
Greater transparency in methodologies and ratings in structured and non-structured products;
Enhanced oversight by the SEC;
Conflicts of interest and liability provisions
No provisions except name change of NRSRO
Gaps in SEC authority
Increase funding to meet need for enhanced SEC regulation and greater enforcement activities
No corresponding provision
Breakdowns in inter-agency communications
Specific authority to share reports and other information among relevant regulators;
Backup authority if primary regulator fails to act;
Systemic Risk Council has authority to recommend increased prudential standards and requirements to primary regulators
Requires functional regulator to share reports with the Market Stability and Capital Adequacy Board
Excessive leverage and insufficient capital
Requires the computation of capital requirements for financial holding companies that are subject to stricter standards to take into account all off-balance sheet activities of the company (Fed authority to exempt a company or certain of its transactions);
15 to 1 cap on leverage ratios for these companies
Include swaps exposure in establishing capital requirements for swap users
Excessive reliance on short-term debt
Fed may limit the short-term debt of financial holding companies that are subject to stricter standards to prevent these entities from exposure to runs on the bank
No provision
** prepared by the Democratic Staff of the House Financial Services Committee
The above chart only identifies provisions in the Wall Street Reform bill (H.R. 4173) that address problems raised by the Lehman failure.emPlease note that this is not a comprehensive analysis of either bill. For a full analysis of all provisions in H.R. 4173, click here.
