Factbox: Major financial regulation reform proposals

Mon Jun 14, 2010 3:00pm EDT

(Reuters) - Negotiators for the U.S. Senate and House of Representatives are hammering out a compromise between two competing bills representing the biggest overhaul of financial regulation since the 1930s.

A House-Senate conference committee must find a middle ground between bills passed by the two chambers. The committee's final report could differ from earlier versions.

Once approved by both chambers, the compromise legislation will go to President Barack Obama to sign it into law. That could happen by July 4, analysts say.

The Senate bill will be used by the conference committee as its base text. Here are its key elements, how they compare to the House bill, and winners and losers on each issue:

PREVENTING MORE BAILOUTS

* Objective: End the idea that some financial firms are "too big to fail." Avoid a repeat of 2008, when the Bush administration launched costly taxpayer bailouts of firms such as AIG but did not bail out Lehman Brothers. Lehman's subsequent bankruptcy froze capital markets.

Congress wants a middle ground between bailouts and bankruptcy. Firms would have to keep "funeral plans" on file that describe how they could be shut down quickly.

The Senate bill would set up an "orderly liquidation" process that could be used in some emergencies, instead of bankruptcy. The process would let authorities seize large firms in distress and put them in Federal Deposit Insurance Corp. receivership, with liquidation required as the next step.

Shareholders and creditors -- not taxpayers -- would bear the losses. Management would be removed. The FDIC's costs would be covered in the short term by a Treasury Department credit line, then recouped by sales of the liquidated firms' assets and, in case of shortfalls, fees slapped on other large firms.

The House bill would set up a similar FDIC process, except that it would be backed by a $150 billion permanent fund paid into by financial firms whose assets exceed $50 billion.

The House proposes that secured creditors in FDIC actions to dismantle troubled firms could have 10 percent of their claims treated as unsecured, imposing a claims "haircut."

Both the House's prepaid fund idea and haircut plan look likely to die in committee, with the Senate plan prevailing.

* Winners and losers: If the new strategy works, the economy will be better protected from financial crises by giving the government better tools to deal with distressed firms. The repurchase agreements market, which is concerned about the haircut provision, would be a winner if it dies.

Big financial firms will likely end up paying new fees.

PROTECTING CONSUMERS

* Objective: Consolidate and improve the government's fragmented financial consumer protection programs with an eye to cracking down on abusive home mortgages and credit cards.

Both bills would consolidate programs now spread across a half dozen agencies into one watchdog with teeth and a director nominated by the president and confirmed by the Senate.

The Senate makes the new entity part of the Federal Reserve, while the House proposes creating an independent agency.

The Senate's watchdog would have to answer, in some instances, to a new Financial Stability Oversight Council led by Treasury. The House's watchdog would have more autonomy.

The House exempts many businesses from watchdog oversight, such as car dealers that do not finance their own lending to their customers. The Senate bill has fewer exemptions.

On another front, the Senate modestly boosts the power of state regulators to enforce consumer protection laws.

* Winners and losers: No matter where the watchdog is located, consumers can expect stronger protections, with credit card and mortgage firms facing tougher rules.

Many senators favor a car dealer carve-out. The Obama administration generally opposes exemptions. Car dealers would win big if they can get an exemption in the bill.

The Senate's approach to state law will likely stand as a compromise between banks and consumer advocates.

VOLCKER RULE

* Objective: Ban risky trading unrelated to customers' needs at banks that enjoy government backing; get banks out of the hedge fund business; limit big banks' future growth.

Obama proposed the rule with his economic adviser Paul Volcker, the former Federal Reserve chairman.

The Senate bill endorses the rule, but calls first for a two-year study and leans on regulators to write the details afterward, leaving the door open to weakening the rule later. Some Democrats are working to add language to the bill giving regulators stricter implementation orders.

The Volcker rule is not in the House bill, though the bill would let regulators bar proprietary trading in some cases.

* Winners and losers: Big banks' profits would be hurt if the rule is enacted. Banks are working to diminish the damage by carving exemptions into the rule. Volcker opposes these efforts and says his rule would help prevent the next crisis.

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