AP News

WHY IT MATTERS: Wall Street regulation and reform


The issue:

The 2008 financial crisis roiled the banking system and swamped the global economy, leaving millions of Americans jobless, underemployed or facing foreclosure. In its wake, Congress set out to overhaul how the government oversees Wall Street. The result was a sprawling law, the Dodd-Frank Act, which aims to prevent future crises by giving the government new tools and restricting banks' activities. The law may make future crises less likely, but it increases costs for companies, especially banks, and their customers.

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Where they stand:

The hard-fought law was a big victory for President Barack Obama, and he would defend it. With Obama's backing, government officials who are putting the law into practice are more likely to adopt a tough stance.

Mitt Romney wants to repeal Dodd-Frank and start over, though he would keep a few core elements that the financial industry supports — for example, revised formulas that determine whether banks have enough solid cash to fall back on in bad times. Romney also would make it harder for financial oversight agencies to impose new rules.

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Why it matters:

Four years after the financial crisis, the economic recovery remains painfully slow.

The debate over banking rules is, at its core, a dispute about how to prevent another economic cataclysm.

The crisis was fueled by a blend of fear and uncertainty. As the housing bubble burst, banks that had invested in the U.S. housing market teetered. Companies, unsure who would be the next to fall, stopped lending to each other.

Businesses failed because they couldn't get cash to cover their daily expenses. Mass layoffs shattered Americans' confidence, making them less likely to buy new cars and houses.

Meanwhile, millions of people faced foreclosure on houses that they bought during the boom, often with high-cost loans they did not understand. Errors and sloppy paperwork by mortgage companies added to their woes.

The result was the nation's worst recession since the Great Depression.

To prevent a repeat crisis, the financial law creates a council where bank regulators can share information and discuss new threats. Big banks have drawn up "living wills," road maps that the government could use to shutter them if necessary. With that orderly process in place, advocates say, companies will be less likely to need emergency bailouts. The government will be better able to defuse problems before they spark panic.

For consumers who were stung by the housing crisis, the law bans risky lending practices like kickbacks paid to mortgage brokers who sold higher-cost loans. It creates a powerful new agency, the Consumer Financial Protection Bureau, to shield people from misleading marketing, hidden fees and other traps.

The problem, opponents say, is that the costs to banks and consumers are prolonging the nation's economic agony. They say this burden outweighs the potential benefits for consumers and the broader financial system.

As companies spend more to make sure they are following the law, the argument goes, they will have less money to expand or hire new workers. Restrictions on how big banks can invest will shrink their profits, making it harder for them to lend and compete globally. To make up the difference, banks say they will have to raise the fees they charge for everything from multibillion-dollar bond offerings to ordinary checking accounts.

Romney and his allies in the financial industry argue that the new rules weaken the system in unintended ways. They say farmers will pay more to protect against swinging corn prices, for example, because of changes to the market for corn futures and similar investments.

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Daniel Wagner can be reached at www.twitter.com/wagnerreports


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