Regulatory Reform Bill Passes House

The House passed legislation Friday that would seek to avoid another financial crisis through a restructuring of the financial regulatory system. However it rejected, by 223-208, an amendment that would have effectively killed the Consumer Financial Protection Agency, replacing it with a council of existing regulators.

The bill, which passed 223-202, imposes more oversight and stronger capital cushions for the largest banks and Wall Street firms, and calls for the regulation of some derivatives and creates a new Consumer Financial Protection Agency to regulate products such as credit cards and mortgages. It would also allow audits of monetary policy by the Government Accountability Office (GAO).

Fed Chairman Ben Bernanke and other top officials for weeks had argued the audit provision would result "in a costly impression that the central bank's rate decisions could be swayed by politics," Reuters reported. They warned this could lead financial markets to fear inflationary policies, which in turn could drive up borrowing costs and undermine the economy. The Fed will have ample opportunity to get allies on Capitol Hill to defeat the audit measure.

On the Senate side of Capitol Hill, the bill is moving much more slowly and final passage is reportedly months away.

Among the reported changes are:

Federal Reserve: The bill would allow Congress to order the GAO to audit Fed activities, which the Fed says would interfere with the central bank's ability to carry out independent monetary policy.

Derivatives: The bill attempts to shine a brighter light on some of the different kinds of complex financial products blamed for bringing down financial companies such as American International Group and Lehman Brothers. It would pass some of these derivatives on to clearinghouses, which would help pinpoint the value of such trades. However, some derivatives would still be unregulated, including those traded by big agricultural and airline companies to mitigate risk.

Oversight: It creates a new oversight council that would look out for major problems at large financial firms, giving the Federal Reserve a key role in enforcing tougher regulations on larger firms.

Executive Compensation: It would give shareholders the right to a nonbinding proxy vote on corporate pay packages.