Congress' Conference Committee Completed for Financial Reform

In a marathon meeting lasting nearly 20 hours, Congress' conference committee finalized the new financial regulation bill at 5:39am ET on Friday. Next, the merged bill goes back to both chambers for their individual votes. The rushed process was completed on-time early Friday morning so that President Obama could explain the new rules Congress will impose to the G-20 this weekend in Toronto. Assuming the votes go smoothly, the bill should pass in both chambers by July 4th. Here are some of the major highlights from the night and morning's proceedings:

Volcker Rule

A watered-down ban of proprietary trading, also known as the Volcker Rule, passed. The final version of the rule would allow banks to participate in private equity and hedge funds up to 3% of their tier 1 capital. They could only, however, have up to 3% ownership of any private equity or hedge fund.

A conflict-of-interest provision was included in this amendment, which was inspired by the Goldman-SEC case. No market-maker can engage in any transaction that could result in a conflict-of-interest with any real or synthetic asset-backed security it has acted as underwriter, placement agent, initial purchaser, or sponsor for in the past year.

House Republicans were worried about the U.S. unilaterally imposing the Volcker Rule without similar measures taken by other nations. The fear was that U.S. competitiveness could be harmed if other nations don't adopt similar regulation. They consequently offered an amendment that would have prevented the Volcker Rule from being effective until at least a majority of the G-20 had agreed to adopt a similar rule. The amendment failed.

Sen. Kanjorski (D-PA) also was bothered by the use of tier 1 capital instead of tangible common equity (TCE). The initial version of the rule would have used TCE instead of tier 1 capital. He said that tier 1 allowed too much flexibility for banks, as he indicated that it provided approximately 40% more investment in private equity and hedge funds. His amendment was rejected.

Derivatives

The big question here was Senator Lincoln's (D-AR) so-called spin-of provision. It would require banks to put their swaps desks in a separately capitalized subsidiary. The Senate's offer included a major change. Certain types of derivatives could be retained, while others would need to be put in subsidiaries, as follows:

• Derivatives can be retained related to: interest rate swaps, foreign exchange, credit default swaps referencing investment grade entities, gold and silver, and hedging for the banks' own risk
• Derivatives must be put in an affiliate related to: cleared and uncleared commodities, energies and metals (except gold and silver), agriculture, credit default swaps not referencing investment grade entities, all equities, and any uncleared credit default swaps

The movie futures exchange was also forbidden. It was just approved by the Commodity Futures Trading Commission earlier this month. Its life will be short-lived.

Covered Bonds

The Senate rejected the House offer which would have provided a framework for covered bonds in the U.S. Sen. Dodd (D-CT) explained that Senate Democrats voted against the provision because the Treasury and FDIC had concerns about with the proposal. House Republicans noted, however, that other agencies, including the Federal Reserve, were in favor of the provision. Dodd promised to hold a hearing to further explore covered bonds in coming months.

The Cost

The Congressional Budget Office found that the financial regulation bill will cost $22 billion over 10 years. Part of that will be paid for by the Securities and Exchange Commission. The remainder, between $15 billion and $19 billion, be paid for by a tax on the financial industry. The Federal Deposit Insurance Corporation will assess financial institutions with assets exceeding $50 billion and hedge funds with assets exceeding $10 billion over five years to cover the costs.

The Dodd-Frank Bill

Around 5:00am, Rep. Kanjorski passed an amendment to rename the legislation the Dodd-Frank Bill in honor of the two chairman Sen. Dodd and Rep. Frank.

Analysis to follow in several hours. . .