House bills aim to fix what ails finance rules

WASHINGTON – The largest rewrite of financial regulation since the Great Depression will clear the House of Representatives during the first week of December, the lawmaker shepherding the legislation promised Tuesday.

Meeting with reporters a day before the House Financial Services Committee begins debating the landmark legislation, the panel’s chairman, Rep. Barney Frank, D-Mass., was confident of passage for several measures that will be combined on the House floor in December.

Collectively, they would create the most sweeping overhaul of financial regulation in seven decades.

Here are some answers to questions about how the legislation aims to fix what went wrong and led to the financial crisis.

Q. Just what do the bills attempt to fix?

A. The various measures address how mortgage lending standards were weakened, how investment banks looked past the bad mortgages when pooling them together into mortgage bonds that were sold to unsuspecting investors, how credit-rating agencies aided and abetted this problem at the expense of investors and how financial firms were able to bet secretly against the very products they were selling.

“They would all be covered by this” legislation, Frank said.

Q. How would mortgage lending get fixed?

A. Frank’s committee already has passed a bill to create a Consumer Financial Protection Agency. If enacted into law, this new agency would oversee consumer credit products such as mortgages. The agency would pass tough new rules to make it harder for lenders – or mortgage brokers who originate loans for them – to engage in deceptive advertising or to give borrowers loans without documenting their income.

Q. Didn’t Wall Street play a role in the housing crisis?

A. Yes, and Wall Street is in the congressional crosshairs. Big investment banks such as Lehman Brothers and Bear Stearns snapped up bad mortgages and pooled them together into mortgage bonds, a process called securitization. They did so without actually keeping these mortgages on their own books. Frank’s legislation would require anyone securitizing mortgages to retain 10 percent of them as an incentive for better oversight and prudent lending.

Q. How did Wall Street dupe investors?

A. Many investors bought the mortgages that investment banks weren’t willing to keep on their own books because the mortgage bonds had an investment-grade rating from credit-rating agencies. Those agencies were paid to help put together the pools, then paid again to rate them. The legislation, which grew out of proposals from the Obama administration, would forbid the rating agencies from advising on how to put together the pools and would block a number of other conflicts of interest.

Q. Any other ways this cracks down on Wall Street?

A. Complex insurance-like bets called credit-default swaps were gasoline on the spreading fire that swept across Wall Street last year. These bets, many of them on the chance that mortgage bonds might default, didn’t take place the way stocks and bonds are normally traded, on a financial exchange.

When home prices collapsed and mortgage bonds began defaulting, the lack of transparency in these bets amplified panic and led to the collapse and government rescue of insurance and finance giant American International Group. The House legislation would force virtually all trading of these complex bets to be settled on a public clearinghouse. Financial companies selling these bets to each other would be subject to far greater reporting requirements.

Additionally, a special Council of Regulators would be formed to determine whether a company has so many complex financial bets that its failure could pose a risk to the entire financial system.