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Will The New Financial Reform Law Benefit You?

Beginning in the middle of the past decade, U.S. banks and other lenders went on a spree, motivated in part by a 2005 bankruptcy law that made it much more difficult for consumers to get out from under loan obligations. Banks and brokerage firms packaged and traded mortgages and other debt, touting the resulting securities as super-safe investments. But by late 2008, it all had come undone, with a spiraling credit crisis that destroyed several major financial institutions, required a massive government bailout to save many others, and triggered foreclosures on millions of homes. U.S. regulators had failed to head off disaster, and banks’ actions had contributed to the worst recession in decades. Calls to fix the broken system were almost universal, and finally, in summer 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. But will consumers really be protected? And will other aspects of the law, intended to restore faith in the financial system, do the job?
Many experts are skeptical. Though the law is massive, at 2,319 pages, it leaves much of the real work of reform for later, charging regulators with studying current practices before proposing and implementing fixes. And many parts of the new law will have only an indirect impact on consumers and investors. Rules limiting proprietary trading by banks could help reduce the risk of another epidemic of bank insolvency. After all, it was the hundreds of billions of dollars of toxic mortgage debt in their own accounts that wrecked so many banks’ balance sheets. Similarly, a requirement for a more transparent derivatives market addresses the havoc that rampant and largely invisible trading of credit default swaps caused. And hedge funds and private equity firms will now be regulated by the Securities and Exchange Commission, though there are questions about whether the SEC will be given the money and manpower to do an effective job.

All of this comes under the heading of bringing Wall Street under control, and as the Federal Reserve, the SEC, and other regulatory bodies conduct their studies and issue new rules, banks and other financial institutions will continue to lobby against strict regulation. The best-case scenario—that logical, comprehensible changes will convince shell-shocked investors that the financial system is safe—remains in doubt.

Meanwhile, it’s a giant new agency, the Bureau of Consumer Financial Protection, that will visibly change the financial landscape for most Americans—and here, too, the jury is still out. The agency will both enforce existing laws and establish new rules. Much of its early focus may be on stricter regulations for mortgage lenders, which could make it harder to get certain kinds of loans. Other practices and products, including credit counseling and payday loans, will also be scrutinized and regulated. The agency will collect and monitor consumer complaints and establish programs to promote financial literacy.

The optimistic view is that the agency will work like the Federal Trade Commission’s Bureau of Consumer Protection, setting and enforcing standards that make sure the only financial products in the marketplace are well understood and safe to use. But that’s a tall order, and much may depend on one person, Elizabeth Warren, whom Barack Obama named to start up the bureau. To avoid a Senate confirmation battle, Warren was officially made an assistant to the President rather than head of the agency. But the Harvard Law School professor, brought to Washington to oversee the $700 billion Troubled Asset Relief Program (TARP), will shape the agenda of the new agency and have considerable autonomy in writing and enforcing new rules. Controversial because of her frequent clashes with Wall Street, Warren has been embraced by many consumer advocates as someone who won’t be pushed into continuing business as usual.
The last time confidence in the financial system was at such a low ebb may have been during the Great Depression, and then, too, people wanted laws that would prevent a repeat of the devastation they were suffering. One result, the Glass-Steagull Act of 1933, put a wall between Wall Street investment banks and commercial banks that stood until the end of the century, when it was repealed as an unneccessary, old-fashioned obstacle to financial innovation. That change, in turn, almost certainly contributed to the banking system’s failure a decade later—and, in its wake, to the latest attempt at financial reform. Who ultimately wins and loses under the new law may not be known for some time.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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