It was the week for marathons, one concluding yesterday at Wimbledon and another just this morning in Congress, where committee members emerged from a 20-hour overnight session with the most sweeping financial regulatory overhaul since the Great Depression.
The bill, which still needs to be voted on in both houses of Congress next week, is in response to the near collapse of the Stock Market in 2008, when everyone wondered if they even had a 401(k) anymore.
In a nutshell, it gives the federal government more control over Wall Street, and Wall Street more oversight of banks and stock companies, all with the goal of protecting your money a lot better than it has been in the past.
Critics of the bill say these regulations hinder banks' ability to make profits, which will actually hurt the economy. But that's another discussion.
As with most 1,500-page documents dense with financial terms that require passing a Series 7 Exam to understand, the bill might as well be written in Martian. It's a lot to absorb. Even legislators admit that they won't know how well all of it will work until it's set in motion. And a lot of these new rules are the high-level type that you won't notice directly in your checking account or the way you manage your own accounts -- except that hopefully you'll have more money there in the end.
1. How banks use your money
Banks love to trade your money to try to make more money for your fund -- and for themselves. But it's risky, and the new regulations limit this activity. Banks must now limit their dabbling in hedge funds and private equity funds to no more than 3 percent of a fund's capital. The goal is to reduce the risk of significant losses at banks that are central to our financial infrastructure.
2. Hiring 'Money Cops'
A consumer financial-protection bureau will be created at the Federal Reserve to police banks and financial-services businesses for credit-card and mortgage-lending abuses. Auto loans are exempt from this.
3. Credit and debit cards
You know how some stores don't let you use a credit card under a certain amount? That's because they are charged bank fees for swiping that nearly negates the price of that candy bar, soda, and bag of chips. The Federal Reserve will now get authority to limit interchange, or “swipe” fees, that merchants pay for each debit-card transaction. The measure also lets retailers refuse credit cards for purchases under $10, as many already do, and offer discounts based on the form of payment.
Other measures that will affect you and your money more indirectly:
- Restrictions on how banks and financial institutions trade "derivatives," a particular category of stocks, with the goal of lowering risk. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies, and commodities, or linked to specific events such as changes in interest rates or the weather.
- Formation of the Financial Stability Oversight Council, a super-regulator that will monitor Wall Street’s largest firms and other market participants to spot and respond to emerging systemic risks. The Treasury Department will lead the panel, which includes regulators from other agencies.
- Large hedge and private equity funds will be forced to register with the SEC, subjecting them to mandatory federal oversight for the first time. Venture capital funds were exempted from the registration rule.
And that's your accounting lesson for today! Lawmakers hope to get President Obama's signature on the bill before July 4.
Image via epicharmus/Flickr