The Conference Committee Must Strengthen Wall Street Reforms

Conference Committee negotiations on Wall Street reform begin today, with several key battles still unresolved. Thanks to intense progressive pressure [1], those negotiations are going to be televised live. You can watch the sessions on the web right here, using a stream provided by the Sunlight Foundation. Stay tuned to see if negotiators tip their hand on any of these key reforms:

Streaming live video by Ustream [2]

1. Derivatives

The Senate's language on derivatives contains a plan from Sen. Blanche Lincoln, D-Ark., that would end taxpayer subsidies for banks who deal derivatives—the toxic contracts that brought down AIG. This is by far the most significant Wall Street reform on the table, and the only serious effort it contains to address too-big-to-fail. But both the House and Senate versions of the bill make it extremely difficult for regulators to actually enforce other key new derivatives rules. Sen. Maria Cantwell, D-Wash., has language to plug this loophole, so watch to see if negotiators are willing to follow her lead.

2. Leverage

Banks amplify their bets in the capital markets casinos with leverage—a trick which basically amounts to borrowing tons of money and hoping for the best. When it works out, banks make out like bandits. When it doesn't, they suffer epic losses. The House bill caps leverage at 15-to-1, meaning banks can borrow $15 for every $1 of their own money. The Senate bill would essentially cap leverage at 25-to-1. Some kind of hard leverage cap is essential, but 25-to-1 is far too high.

3. The Consumer Financial Protection Agency

The House version of this agency is generally stronger than the Senate version, with more independence and broader authority. But the House version also exempts auto dealers from CFPA oversight, which the Senate version does not.

4. The Volcker Rule

The best version of President Obama's signature Wall Street reform was an amendment written by Sens. Jeff Merkley, D-Ore., and Carl Levin, D-Mich. It was never voted on in the Senate, and the House bill contains no version of any ban on risky proprietary trading by commercial banks. Rumor has it that negotiators are trying to offer a strong Volcker Rule in exchange for nixing the Lincoln language on derivatives. That's a lousy deal. The two reforms are complimentary and would work best in tandem, but forcing taxpayer money out of the derivatives business is far more important than a prop trading ban.

5. Rating agencies

Sen. Al Franken pushed through an amendment that substantively changes the corrupt business model at rating agencies. Right now, rating agencies do not get paid by the investors who use their ratings, but by the very banks who are issuing the securities that need to be rated. Franken would end this system, having regulators to select which rating agencies rate which securities, rather than the banks who issue the securities. The House bill largely leaves the rating agency business model unchanged.

6. Swipe fees

When you buy something at a store with a credit or debit card, Visa and Mastercard charge that store a fee. The store, in turn, charges you more for its products, making everything everybody buys more expensive. The Senate bill has language cracking down on debit card fees, but the House bill does not.