(Part 1 of 2)

A sweeping financial reform package passed the U.S. Senate last week. With a version already passed in the House, now compromises must be worked out by a conference committee to be led by Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and House Financial Services Committee Chairman Barney Frank (D- Mass.).  The indication is they would like to send a final bill to President Obama by July 4.

However, there remain significant points of contention to be negotiated between the House and Senate; perhaps most notably the Senate provisions forwarded by Sen. Blanche Lincoln (D-Ark.) that require banks to spin off their derivative trading to affiliate entities. Over the next few weeks, advocates will continue to promote their position on the several items at play and the final product is still in question.

Below are descriptions of the major components in the Senate bill (see the 1,300-plus page bill in its entirety):

• New Regulatory Authority – Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm’s collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Management could be removed, with shareholders and unsecured creditors bearing losses. Other provisions would make it harder for top executives at the failed firms to claim large compensation packages, and it would give the government power to limit payments for certain creditors of failed firms. The Treasury would supply funds to cover the upfront costs of winding down the failed firm.
• Consumer Agency – Creates a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses, large non-bank financial companies such as big payday lenders and consumer reporting companies, and for banks and credit unions with assets of more than $10 billion.
• Derivatives – Requires the vast majority of all derivatives trading be executed on a public exchange as opposed to between banks and their customers as many contracts are currently. Most controversially, the bill would adopt language written by Sen. Lincoln that would compel any large commercial banks that have access to the Federal Reserve’s discount window to spin off their derivatives trading business. The Fed, FDIC andTreasury, as well as the banking industry, have argued against this measure.
• Financial Stability Council – Establishes a new, nine-member Financial Stability Oversight Council, comprised of existing regulators, charged with monitoring and addressing system-wide risks to the nation’s financial stability. Among its duties, the council would recommend to the Fed stricter capital, leverage and other rules for large, complex financial firms that are judged to threaten the financial system. In extreme cases, would have the power to break up financial firms.
• Oversight Changes – Eliminates the Office of Thrift Supervision, but an attempt to strip the Fed of its oversight of thousands of community banks was reversed with an amendment. Would empower the Fed to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.
• Federal Reserve Oversight – Calls for a one-time government audit of all of the Fed’s emergency lending programs from December 2007 onward, including facilities used to help deal with the collapse of Bear Stearns & Co. and the program to stabilize asset-backed securities markets. The Government Accountability Office would also review the Fed’s corporate governance, including whether there are conflicts of interest inherent in the current design of the Federal Reserve System.

Summary of remaining key components to be posted later today.