Senate passes financial-reform bill

The Senate on Thursday approved and sent to President Obama a landmark bill to rein in unregulated Wall Street markets for the first time while covering America’s financial landscape with an intricate thicket of new regulations.

The Senate vote was 60-39. Nearly two years after the 2008 financial crisis plunged the nation into economic chaos, despite dozens of hearings and hundreds of speeches, the massive measure picked up only a few moderate Republican votes while relying on large Democratic margins in both houses to deliver one of Mr. Obama’s top priorities to his desk.

The White House immediately hailed the legislation as a victory over Wall Street greed and excess that Democrats can tout to voters in upcoming congressional elections.

President Obama said the measure will “protect consumers and lay the foundation for a stronger and safer financial system” while dismissing Republican criticism that the bill overreaches by meddling into the financial lives of every business and household.

“Unless your business model depends on cutting corners or bilking customers, you have nothing to fear,” he said.

Mr. Obama plans to sign the bill into law next week, making it one of his most important achievements since taking office, along with health care reform and last year’s $862 billion economic stimulus bill.

But even before the bill cleared Congress, the House’s top Republican suggested that the GOP will try to repeal the measure if it takes control of the House in November, as some pundits predict.

“I think it ought to be repealed,” said House Minority Leader John A. Boehner, Ohio Republican. “It’s going to punish every banker in America for the sins of a few on Wall Street,” while making less credit available to American consumers and businesses.

Thursday’s vote closely followed party lines. Every Democrat but one - Sen. Russ Feingold of Wisconsin - and both the chamber’s Democratic-leaning independents voted for the bill. Every Republican but three - Sens. Susan Collins and Olympia J. Snowe of Maine and Scott Brown of Massachusetts - voted against the bill.

The bill started out as a vehicle to subject for the first time the complex $670 trillion derivatives markets to federal regulation and public trading. Another important mission was to give federal regulators the tools they need to dismantle failing financial giants like American International Group rather than bail them out in the future.

But as it made its way through Congress under the leadership of Sen. Christopher J. Dodd, Connecticut Democrat, and Rep. Barney Frank, Massachusetts Democrat, the bill accumulated hundreds of provisions unrelated to its original mission while, critics say, failing to address major causes of the mortgage meltdown that led to the 2008 financial crash and bailouts.

A big omission was determining the fate of insolvent mortgage giants Fannie Mae and Freddie Mac, which played a major part in financing the housing and mortgage bubble and this year became the biggest liability for the government in the aftermath of the crisis.

Enactment of the 2,300-page bill marks only the beginning of a years-long process in which federal agencies will promulgate an estimated 533 new rules and conduct 60 studies with an eye toward regulating everything from Wall Street credit-rating agencies to the street-corner lenders who give workers advances on their payroll checks.

The long regulatory process will prolong the battle between Wall Street firms, banks, labor unions and consumer groups that characterized the congressional debate, with the likelihood that many of the most controversial provisions will end up in the courts for final judgment.

Treasury Secretary Timothy F. Geithner and other regulators pledged to move swiftly to set up the elaborate new regulatory structure for overseeing giant banks and international corporations whose activities potentially can threaten the financial system. Also to be established is a major new consumer regulatory agency housed within the Federal Reserve.

The Securities and Exchange Commission, which is charged with writing more than 100 rules and studies, showed it was already on the case, announcing a record $550 million settlement with Goldman Sachs over charges that the storied Wall Street firm misled investors in a subprime mortgage product just before the markets collapsed.

The SEC will decide, among other things, whether and how to regulate Wall Street credit rating agencies, whose AAA ratings on most subprime derivative securities prompted banks and investment funds around the world to put huge amounts of money into the risky market.

In a sign of how the measure already is shaking the foundations on Wall Street, credit agency Standard & Poor’s Corp. immediately downgraded the ratings of its rival Moody’s Investors Service, citing the likelihood that the raters will be less profitable and more prone to investor lawsuits under the legislation.

Financial analysts had mixed appraisals of whether the legislation will succeed or fail in its stated purpose of preventing another financial crisis like the 2008 collapse, which precipitated the deepest recession since the Great Depression.

“It takes several steps in an attempt to improve the stability and transparency of the financial markets,” said Jeff Kleintop, chief market strategist at LPL Financial. But he said it could have unintended consequences, such as shutting off credit for many consumers and businesses by discouraging innovative lending.

Herbert Kaufman, an emeritus business professor at Arizona State University, said he worries about the potential for regulatory overkill.

“The worst point is that it creates a new layer of bureaucracy,” he said. Rather than create a new agency to oversee all businesses that lend to consumers, for example, “consumer protection could have been improved under existing agencies like the Fed,” he said.

Ultimately, whether the legislation succeeds in stabilizing the financial system or just weighing it down with a maze of regulation will depend on what the regulators do in coming months, he said.

Both banking groups and their consumer and labor adversaries vowed to keep lobbying during the regulatory process to get the results they want.

“The fight will continue for stronger regulation, including stricter limits on bank size and leverage to ensure no bank will ever again be deemed ’too big to fail,’ ” said Carmen Balber, Washington director for Consumer Watchdog. She called the bill “a critical first step toward reversing the deregulatory excesses that culminated in the 2008 financial collapse.”

But Steve Bartlett, president of the Financial Services Roundtable, vowed to “work closely with regulators” to ensure the measure doesn’t crimp bank profitability to the point that they stop making loans to consumers and businesses.

“If that occurs, the entire economy will suffer,” he said.

c Sean Lengell contributed to this report.