Revelations from the Launch of the Strictest Financial Reform Bill

United States President Obama signed the financial reform bill on July 21, passing it into law and indicating the end of two years’ work on American financial reform legislation. Wall Street has officially opened the curtain to the prologue of a new financial era.

This bill is regarded as President Obama’s most important bill since taking office, after the healthcare bill. The entire process — from the bill’s proposal to its final official unveiling — lasted two years. During these two years, the bill was faced with many trials and obstacles, such as the question of its necessity, what should go into it and whether or not it would satisfy the interests of all parties, especially the personal interests of the major players on Wall Street. These big shots pooled enormous resources to send lobbying groups to petition on Capitol Hill, fighting measure for measure with the Obama administration. On July 15, the Senate, by passing the final version of the financial oversight reform bill, eliminated the final obstacle to the bill becoming law. In response, Obama exalted: The interest groups trying to prevent the financial reform bill had been defeated! At President Obama’s signing ceremony on July 21, the CEOs of many banks rejected invitations to attend, revealing the degree of difficulty in passing the bill.

The new bill will rigorously oversee Wall Street banks entering the high-risk derivative market as well as restrict banks that throw themselves into hedge funds and other speculative transactions. Financial institutions that offer services affecting the average American, such as credit cards and mortgage loans, will also be strictly supervised to protect consumers’ financial rights. Although there is still dispute, doubt and suspicion over the law’s introduction, especially since the major heads of Wall Street have already shown that they are not letting the matter rest, there are preparations for passing on the costs of the reform to taxpayers, indicating the pressures being placed on the government. Some citizens are also skeptical of this and wonder if the law will continue to be carried out. Be that as it may, the passing of this bill gives other countries, including China, much enlightenment.

It is worth it, for many countries, to refer to the purpose and goal of the bill. President Obama ‘s speech at the signing ceremony concisely and directly sums up the purpose of the bill: This reform represents the most powerful protection of consumer finance in history. The financial reform bill makes sure that consumer rights are not infringed upon. The bill will work within the financial system to protect the people; not big banks, not lenders, nor investment agencies. After the financial crisis, the American government learned from the mistakes of the past, emphasizing measures to protect financial consumers; this is worthy of imitation by all countries in the world, including China.

The bill is an impressive 2323 pages, but there are several key points that are most worthy of attention. These include setting up a specialized agency, allocating specialized staff, having the authority to decide which financial institutions might unleash a systematic attack on the market and preventing financial institutions’ risky actions from creating systematic risk by more aggressively restricting them in capital and liquidity. Other measures include creating a new consumer’s financial protection department; implementing oversight of consumer financial products and service organizations, such as credit card providers, mortgage lenders and other lenders; realistically protecting consumer rights; bringing OTC derivatives, which lacked regulation, into the field of view of oversight; and limiting banks’ self-operated transactions and high-risk derivatives transactions. The U.S. Federal Reserve will supervise corporations’ senior management salaries to ensure that upper-level management pay structures will not cause an excessive pursuit of high risk. The Fed will provide general guidelines as opposed to formulating specific rules. If it is found that the salary system causes corporations to pursue too many high-risk transactions, the Fed will have the power to interfere and stop such activities. In comparison, the salaries of Chinese financial institutions’ senior-level management not only face no restraint, but are being allowed to skyrocket unbridled. In the past, such salary increases were kept low-key and even secret. Today, they have become open and have been legalized. The implied risk is such that cannot be ignored.

Another revelation is that the United States, in the post-financial crisis period, is attempting to, through substantive laws, prevent a repeat of disastrous policy. One piece of legislation cannot possibly be all-inclusive or all-powerful. American financial institutions, in light of legal loopholes, have launched innovations in full swing; the U.S. government, in discovering that financial institutions were taking advantage of these loopholes, once again turned to legislation to carry out oversight. This model of innovation — oversight — re-innovation — re-oversight creates a situation where, at the same time that financial institutions innovate, they are met with ever-stricter oversight from the law.