Wall Street reform: Now, it's the law

By Jennifer Liberto, senior writer

WASHINGTON (CNNMoney.com) -- As soon as President Obama's name showed up on the Dodd-Frank Wall Street reform law Wednesday, the way the financial industry does business changed.

Immediately, regulators get new powers to take down failing giant financial firms -- powers they didn't have in 2008 when the investment firm Lehman Brothers collapsed and threatened the entire financial system.

At the signing Wednesday, Obama said the law "will rein in abuse and excess" and that taxpayers would "never again be asked to pay for Wall Street's mistakes."

Other big provisions are closer to a year away, such as forcing complex financial contracts to be traded on open exchanges, and creating new consumer protection rules requiring more disclosure and fewer hidden fees for mortgages and credit cards.

But most of the rules limiting the kinds of risky bets that big Wall Street banks can make and how much cash they must keep on hand are several years away.

Among provisions of the new law that will go into effect between now and April 21, 2011:

Immediately: The Federal Deposit Insurance Corp. creates a mechanism to liquidate failing large financial firms that threaten the financial system.

The FDIC is already moving to create new rules that would detail how creditors to a failing financial giant would be treated under the new unwinding powers, said FDIC spokesman Andrew Gray.

In addition, as a result of the new law, the FDIC said Wednesday that the limit on insured individual deposits has been raised permanently to $250,000. The limit had been raised from $100,000 on a temporary basis since early in the financial crisis, in October 2008.

Within 3 months: A new council of regulators meets in October and starts figuring out ways to identify firms that are big enough to pose a danger to the financial system.

Within 6 months: Shareholders get a non-binding vote on executive pay and generous packages set up for executives who part ways with the company.

Within 9 months: Federal Reserve releases new rules curbing the swipe fees that retailers pay banks and credit unions on debit cards.

Firms that chop up and turn pieces of mortgages into securities for others to buy must keep a 5% of those mortgages, so they retain some risk if the mortgages turn out to be toxic.

Down the road

Besides FDIC, other arms of the federal government are preparing to implement reform.

The Treasury Secretary has the power to start setting up the new consumer financial protection agency, even before President Obama appoints the head of the agency, Deputy Secretary Neal Wolin said Tuesday.

"We're not going to wait (until a director gets appointed) to begin standing this thing up," he said. "It will be important to get the momentum going and have the thing ready for it to be effective as soon as it can be. And then the director will, once confirmed, take it from there."

In the meantime, the Commodities Futures Trading Commission and the Securities and Exchange Commission both have a lot of work to do. They have a year to lay out the rules forcing many derivatives on to clearinghouses and exchanges, which will help pinpoint the value of trades.

The agencies also have a year to figure out how much money firms must post as collateral for such bets.

SEC Chairwoman Mary Schapiro said Monday her office would need 800 new staffers to tackle the big work load ahead.

By contrast, it could be a couple of years before some of the bigger crackdowns on Wall Street banking bets go into effect, including curbs on speculative trades that banks make for their own profit-making purposes and limits on bank'ownership of hedge funds.

The new law gives banks opportunities to delay the full impact - in the case of exiting hedge funds, possibly up to a dozen years, according to an analysis by the Davis Polk & Wardwell law firm.

Bank lobbyists and banking trade groups say the delay in getting to the banking standards was necessary. That's because new rules dictating how much cash banks should have on hand and what kind trades they can make could make it tougher for consumers and businesses to get loans.

"As a policymaker, you've got to balance wanting to change the rules with not wanting to shock the system in a fragile period like we're now in, particularly with regard to things like bank capital," said John Dearie, executive vice president for policy at the Financial Services Forum, a trade group for large financial firms.

The new unwinding powers, the new risk retention requirements on mortgage securities and the new derivative rules are among the most important to prevent the next financial crisis, said Lee Sachs, a former top adviser to Treasury Secretary Timothy Geithner.

"I'd want to make sure those things are solidly in place as soon as possible," said Sachs, a guest scholar at the Brookings Institution. "The derivatives clearinghouses, in particular, if done properly, could do as much to stabilize the system as almost anything else."  To top of page

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