Finance

Finance Reform: Three Changes, And A Question

Congress just pulled an all-nighter to hammer out the final details of the finance-reform bill. Here are three important changes that emerged at the last minute. Also: One big, unanswered question.

1. Banks Can Still Invest Billions In Hedge Funds

The bill restricts — but doesn't ban — banks' speculative investments with their own money.

It bars banks from trading on their own accounts (they can still make trades on behalf of clients).

But the final version of the bill does let banks invest up to 3 percent of their capital in hedge funds and private equity funds. The rules will be phased in over several years.

2. Banks Stay In The Derivatives Business

The final bill lets banks keep most of their derivatives business.

Trading derivatives can create large risks (that's what brought down AIG), and the Senate bill would have forced banks to spin off derivatives trading into separate units. That would have required them to set aside more money against possible losses.

But the final bill lets banks keep trading the types of derivatives that account of most their business — those related to interest rates and foreign currencies. Proponents of this change argued that those types of derivatives are central to what banks do.

Banks will also be allowed to trade credit default swaps (insurance that pays off if a borrower defaults on a loan) as long as the swaps go through a clearinghouse.

3. Up To $19 billion In New Fees For Big Banks And Hedge Funds

The Congressional Budget Office has estimated that the finance bill could increase the federal deficit by more than $19 billion over 10 years, largely due to provisions for shutting down failing firms.

A measure added near the end of the negotiations would recoup that cost by levying a new tax on banks with assets of more than $50 billion and hedge funds with more than $10 billion.

Unanswered Question: Will Goldman Sachs Change Its Status?

At the height of the financial crisis, the government encouraged Goldman Sachs and Morgan Stanley to become "bank holding companies," a shift made them more like traditional, commercial banks — and gave them access to loans from the Federal Reserve.

The firms may now look to shed that status, to avoid some of the restrictions the finance bill places on bank holding companies, especially the limits on trading.

But they may be prohibited from doing that.

Legislators had earlier discussed a provision that would have prevented this shift; as of this morning, it was unclear whether that provision made it into the final bill, according to Lawrence Kaplan, an attorney at Paul, Hastings in DC.

Kaplan, who represents represents banks and other financial services companies, did not discuss particular banks with me. But he said some companies could sue to be allowed to change their status, if the bill prevents them from doing so.

"This is going to be a lightning rod," he said.

For more on the bill: Read reports from the AP, NYT, FT, WSJ and Bloomberg News.

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