* Fed wins back supervision of smaller banks in amendment
* Senate moves to bar mortgage kickbacks, "liar loans"
* Attempt to weaken derivatives crackdown falls short
* Mortgage lenders must retain 5 pct stake
(Adds derivatives vote)
By Kevin Drawbaugh and Andy Sullivan
WASHINGTON, May 12 The Federal Reserve scored a
victory and mortgage bankers suffered a defeat on Wednesday as
the U.S. Senate took aim at bank supervision and housing
finance in its sprawling Wall Street reform effort.
Reversing an earlier plan drawn up by Senator Christopher
Dodd, the Senate approved an amendment by a 90-9 vote to
preserve Fed supervision of hundreds of smaller banks, instead
of transferring them to other regulators. [nN12193651]
The vote was a setback for Dodd, the Democratic chairman of
the Senate Banking Committee, in his bold effort to rationalize
the patchwork U.S. bank supervision system, widely faulted for
missing the 2008-2009 financial crisis.
The Senate also attacked several lending practices
implicated in the mortgage meltdown behind the crisis, which
prompted Congress last year to undertake the biggest overhaul
of financial regulation since the 1930s.
President Barack Obama has pressed lawmakers for broad
reforms to make banks and markets less prone to crises. Final
approval of the Senate bill could come next week.
Financial firms' future profitability, risk capacity and
growth potential hang in the balance.
The Senate voted 63 to 36 to end mortgage kickbacks and
"liar loans," two practices that led to a proliferation of
shaky mortgages in the years before the crisis. [nN12104773]
Incentives known as "yield spread premiums" encouraged
brokers to steer consumers into risky, high-interest loans even
if they qualified for cheaper loans.
Liar loans let consumers qualify for loans they could not
possibly repay if they opted to simply state their income or
other assets, rather than waiting for verification.
The Democratic bill attacks the mortgage market from
multiple directions, but avoids the central problem of fixing
Fannie Mae FNM.N and Freddie Mac FRE.N, the giants of
housing finance seized by the government in 2008.
Democrats on Tuesday defeated a Republican amendment that
would have ended government control of the two firms, arguing
that the issue should be dealt with separately next year.
KEEPING 'SKIN IN THE GAME'
Amid a report that U.S. investigators are probing whether
Morgan Stanley (MS.N) misled investors about mortgage
derivative products, the Senate also voted to keep a measure in
the bill, opposed by the mortgage industry, that would require
lenders who bundle and resell mortgages on the secondary market
to retain at least a 5 percent stake in their products.
By a vote of 42 to 57, the Senate rejected a Republican
measure offered by Senator Bob Corker that would have gutted
that "skin in the game" provision. [nWAT014458]
In a related matter, the Federal Deposit Insurance Corp
formally proposed giving federal protection to home loan and
other debt securitizations if they meet higher standards and
banks retain some of the risk associated with the products.
The FDIC proposal and the Senate's measure on risk
retention will make it more expensive to originate and
securitize mortgages, but they will not devastate the market,
said Concept Capital policy analyst Jaret Seiberg.
The Senate also rejected a separate measure that would have
weakened the bill's crackdown on the unpoliced, $615 trillion
derivatives market, which played a central role in the
Republican backers said the current proposal could drive up
costs for businesses that use derivatives to reduce their
exposure to currency swings, commodity-price spikes and other
risks. The Obama administration said they were simply carrying
out the the wishes of Wall Street giants that could see their
"When it comes to trying to defeat financial reform, Wall
Street lobbyists just won't give up," White House
communications director Dan Pfeiffer wrote.
With more than 200 amendments filed on the bill, the Senate
has resolved a number of contentious issues.
So far, it has settled on a method to unwind troubled
financial firms, while defeating a Republican attempt to water
down consumer protections.
To satisfy concerns that the new consumer-protection bureau
would impose burdensome regulations on companies that are not
involved in lending, the Senate unanimously adopted a measure
that clarifies that small businesses like jewelers and
orthodontists that extend credit to customers would be exempt.
MORE FED SCRUTINY
The Senate has also voted to examine the Federal Reserve's
actions during the crisis, heeding widespread public
frustration with the widespread Wall Street bailouts that
experts say averted a deeper crisis.
Lawmakers still have not resolved how to ensure that
speculative trading activity by banks does not again put the
financial system as a whole at risk.
Later this week, the Senate could toughen a measure that
would bar banks from high-risk speculative trading and require
nonbank financial institutions to set aside more capital for
Lawmakers also could soften a proposal that would prevent
banks from participating in the lucrative swaps market.
Any legislation that clears the Senate must be reconciled
with a reform bill that passed the House of Representatives in
December before Obama can sign it into law.
If approved, the Wall Street reform bill would give
Democrats a major legislative victory ahead of November's
elections. Republicans have worked for months to weaken and
delay the bill, although they are keenly aware of the issue's
So far, the debate has been markedly more civil than the
all-out warfare that marked the health-care overhaul.
(For a Factbox on key amendments to the reform bill,
double-click on [ID:nN04109024])
(For a Factbox on the major provisions of the Senate bill,
double-click on [ID:nN26197405])
(For a Factbox on Republicans counterproposals, double-click
(For a Factbox on the key players in reshaping U.S. financial
rules, double-click on [ID:nN26201371])