US PRESIDENT Barack Obama and his Democratic colleagues won a major victory in the battle for sweeping financial reform this week, but the war on the issue is not yet over.
The US Senate passed a reform Bill by a 59-39 majority on Thursday, bringing three weeks of debate to an end. But a compromise now has to be hammered out to reconcile the Senate legislation with comparable but subtly different measures passed by the House of Representatives last December.
The eventual passage of a Bill into law seems almost inevitable. But the contrasts between the two proposals make it all but impossible to predict the specifics of which measures will take effect, and when.
One of the key issues is how, in the future, to wind up ailing banks and other large institutions at no cost to US taxpayers. The House version of the Bill proposes the setting up of a $150 billion (€119 billion) fund, financed by levies on financial firms, which would then be used to deal with this eventuality.
This idea came under criticism in the Senate and, in part to try to win Republican support, Democrats suggested that no costs would be raised in advance; instead, they would be recouped from big financial firms in the wake of one of their number collapsing.
Another point of contention concerns the market in derivatives – complicated financial instruments whose value is based upon the value of other assets such as loans, energy prices or commodities.
A controversial amendment in the Senate Bill would, in effect, force banks to spin off their derivatives-trading arms into separate entities. This measure is not in the House version of the legislation.
The prime mover behind the amendment, Democratic senator Blanche Lincoln, has insisted that it should remain in the final version of the Bill, but her enthusiasm is not shared by the White House or US treasury secretary Timothy Geithner.
Some measures that appear to stand a good chance of making the final cut, such as a ban on proprietary trading, would not come into effect for some time.
The legislation passed by the Senate would create a new body, the financial stability oversight council, which would presumably form almost immediately. Among its initial tasks would be to look into what form a ban on proprietary trading would take.
Proprietary trading basically refers to banks using their own funds to invest in the stock market. Whatever rules emerge from this process would not take effect for a further two years.
Other proposals – such as the Senate’s suggestion of a ban on variable commissions being paid to mortgage brokers depending on what kind of loan they get customers to sign up for – seem more likely to come into force promptly.
The timescale of the Bill will become clearer soon. Barney Frank, the Democratic congressman most closely associated with the House version of the legislation, said he believed the final Bill would be presented for Mr Obama to sign into law before the July 4th holiday.
Four Republicans voted for the Senate legislation but most members of their party remain opposed to it. Democrats, on the other hand, are convinced that popular anger at Wall Street places their party on the politically beneficial side of the issue.
“Over the last year, the financial industry has repeatedly tried to end this reform with hordes of lobbyists and millions of dollars in ads,” Mr Obama said at the White House on Thursday. “Today, I think it’s fair to say that these efforts have failed.”