HEADING OFF FUTURE CRISES HEADING OFF FUTURE CRISES Q: Would the Senate and House bills ensure there wouldn't be another financial crisis? A: Consumer advocates say the proposals go a long way by tightening rules on the trading of risky securities such as derivatives, providing for an orderly liquidation of big failing Wall Street firms and creating a consumer watchdog group to oversee products such as mortgages and credit cards. Critics cite loopholes. For instance, hedge funds, though subject to some regulation, as well as private-equity firms, could largely operate in the shadows. Q: Would the bills guarantee there wouldn't be any more big bailouts of Wall Street firms? A: The proposals would minimize the chances by providing ways to wind down large failing firms without endangering the financial system. Secured creditors would be made whole, and unsecured creditors and shareholders would reimburse any upfront costs paid by taxpayers. But a Senate amendment that would have limited the size of the firms failed, and some say that if a big Wall Street firm were teetering, the government might be hard-pressed not to come to the rescue. Q: Why would the bills give more oversight powers to the Federal Reserve, which failed to prevent the financial crisis? A: Obama administration officials and Fed Chairman Ben Bernanke argued that only the Fed has the experience to take on the responsibilities of regulating large non-bank financial firms such as insurance giant AIG and identifying risks to the financial system. The Senate bill would try to strengthen the Fed by allowing more audits of the central bank's emergency lending, bolstering its oversight staff and barring member banks from electing directors. Q: Do the bills address mortgage-finance giants Fannie Mae and Freddie Mac? A: Not really. Senate Republicans proposed an amendment that would have ended government subsidies for the troubled companies. Democrats opposed it, saying no one has come up with an alternative financing source. Last year, the government said it would cover unlimited losses of Fannie and Freddie through 2012, waiving a previous limit of $400 billion. They have received $145 billion.The Senate agreed to submit a plan for ending taxpayer support for the firms. Q:Would the bills hurt Wall Street and the economy? A: Some financial service firms say they would. Requirements that banks hold more in capital would mean less money for loans. Forcing banks to spin off their derivatives trading units could deprive the firms of revenue and drive those operations overseas, some critics say. Joe Lieber of Washington Analysis says the Senate bill could cut Wall Street firms' earnings by about 20%, but the effect on economic growth would be relatively small. By Paul Davidson Washington reins in Wall Street: What happens next? The sweeping overhaul of financial regulations passed the Senate last week after a sometimes-acrimonious debate. Now, another battle begins: reconciling differences between House and Senate versions of the 1,500-page bill in conference. While the two bills are largely similar, there are key differences whose resolution could determine how tightly the reins on Wall Street will be pulled and how many safeguards are provided to consumers. For example, the Senate bill requires banks to divest their derivatives trading units and encourages regulators to prohibit banks from using their own capital for high-risk investments. The House bill doesn't. FINANCIAL REGULATION: House and Senate differences The Senate places a new consumer watchdog agency within the Federal Reserve. The House measure calls for a stand-alone entity but exempts car dealers — which lawmakers say sometimes steer buyers into bad loans — from agency oversight. The Senate bill provides for the orderly liquidation of failing financial firms but doesn't set aside a specific amount of money to pay for it. The House calls for a $150 billion fund, paid by assessments on financial institutions. "We expect (the conference) to be contentious," says Steve Adamske, spokesman for the House Financial Services Committee. Committee Chairman Barney Frank, D-Mass., will chair the conference committee, which will also feature Senate Banking Committee Chairman Chris Dodd, D-Conn., chief author of the Senate bill, and other members of committees with roles in financial regulation. All told, about 20 lawmakers from each of the chambers and both parties will participate, though the makeup will reflect the Democrats' majority. The conference is expected to begin after Memorial Day and last about two weeks. The legislation that emerges must then be passed again by the House and Senate. Frank and Dodd said Friday that they expect to present a final bill to President Obama by July 4. Frank also said he would like the conference to be televised, though that will be decided by the entire committee. Frank "wants to give the people the confidence that we are working to resolve the issues that led to taxpayer bailouts of the financial industry," Adamske says. Typically, the House passes stricter regulatory bills. But the Senate overhaul was toughened as public outrage boiled after the government filed fraud charges against Goldman Sachs last month. The House measure passed in December. As a result, Joe Lieber of Washington Analysis believes the final product "is likely to look more like the Senate bill. It's likely to be less moderated." Key parts of the Senate financial overhaul bill and how they differ from the House bill passed in December. Main issues What Senate bill does How House bill is different Consumer protection Consumers have not been adequately protected against predatory mortgages, credit cards and other financial products. Regulators such as the Federal Reserve and Federal Deposit Insurance Corp. are focused mainly on safeguarding the safety and soundness of the institutions they regulate, not looking out for consumers. It would create an independent Consumer Financial Protection Bureau in the Federal Reserve that would write rules and oversee a range of financial products offered by myriad providers, including banks, mortgage brokers and payday lenders. A new oversight council could veto its regulations with a two-thirds vote. The bill helps consumers by:



 Making it easier for merchants to give discounts for paying cash.

 Capping fees merchants pay for debit transactions, savings that could be passed to consumers.

 Requiring that consumers get their credit scores free when they're denied credit. Consumer bureau would be stand-alone agency, rather than in the Fed. Unlike the Senate bill, its rules would not be subject to a possible veto by the oversight council. However, some small businesses such as auto dealers, which Democrats say sometimes steer buyers into deceptive or high-cost loans, would be exempt from oversight by the agency. Ending "too big to fail" During the financial crisis, the government had no way to wind down large non-bank financial companies such as Bear Stearns and AIG without threatening the entire economy, because institutions are so closely interconnected. The firms took big risks, knowing taxpayers would foot the bill. The government had to spend hundreds of billions of dollars to bail them out. The firms would face tighter regulation, such as having to keep higher capital reserves. If they failed, certain creditors would be made whole to protect the financial system, but shareholders and unsecured creditors would bear losses and pay the costs of winding them down. It would create a $150 billion fund financed by large financial companies to pay for the dissolution of failing companies. The Senate version originally included a $50 billion fund, but that was removed after critics said it would encourage bailouts and possibly limit the government's ability to assess more fees on firms. Executive pay Big Wall Street bonuses rewarded short-term profits over the long-term health of the firms. That gave executives incentives to take big risks with high leverage as the housing bubble formed and stick taxpayers with the bill when their bets fizzled. The bill would give shareholders a non-binding vote on executive pay and require public companies to claw back compensation based on inaccurate financial statements that don't comply with accounting standards. It would require directors to win by a majority vote in uncontested elections. The House bill would require financial institutions with more than $1 billion in assets to disclose compensation structures that include any incentive-based elements. Derivatives Derivatives, which are bets on the price movement of a stock, commodity or other security, were squarely behind the collapse of AIG, the most expensive government bailout in U.S. history. Because they are often private agreements between parties, they are hard to value. The volume of outstanding derivatives worsened some firms' financial troubles as the mortgage market spiraled down. The bill would require most derivatives to be traded on exchanges to increase transparency and to be cleared through third parties to ensure there's collateral behind the deals. A controversial provision would require Wall Street banks to spin off their derivatives trading units, which are very lucrative for them. Many industry players such as farmers and utilities which purchase derivatives to hedge the risk of price changes for their products would be exempt. Also, the bill would not require banks to spin off their derivatives units. Oversight powers No federal agency is in charge of monitoring the stability of the entire financial system. A large interconnected company, such as insurance giant AIG, whose failure would have had wide ripple effects, might have been stopped from placing big bets on the mortgage market if such an entity existed. Bill would create a nine-member council of regulators including officials from the Fed, the SEC and FDIC to identify risks posed by large financial firms. It can recommend to the Fed that such a firm increase capital reserves and even approve, with a two-thirds vote, a Fed decision forcing the firm to divest some holdings if it poses a grave threat to the economy. It would create a council to monitor risks to the system and make recommendations but would leave it to various relevant agencies to implement them rather than the Fed exclusively. Credit-rating agencies Agencies such as Standard & Poor's and Moody's gave misleadingly high ratings to bad securities during the crisis. A big reason, critics say, is that the agencies are paid by the financial firms issuing the debt, such as mortgage-backed securities. A new independent board would randomly select the agency providing the initial rating to a security. Agencies also would have to disclose more information about how they assign ratings. Ratings agencies would have to register with the Securities and Exchange Commission. There's no stipulation for how an agency is selected. Guidelines: You share in the USA TODAY community, so please keep your comments smart and civil. Don't attack other readers personally, and keep your language decent. Use the "Report Abuse" button to make a difference. You share in the USA TODAY community, so please keep your comments smart and civil. Don't attack other readers personally, and keep your language decent. Use the "Report Abuse" button to make a difference. Read more