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A year-long campaign to re-regulate the financial services sector in the USA, after decades of reckless deregulation, moved closer to victory in Washington, D.C. when the U.S. Senate voted 59-31 in favor of Restoring American Financial Stability Act of 2010 on 20 May. Although it is not the final bill President Barack Obama will sign, the reforms it contains would:

· Raise capital requirements for the biggest, most internationally integrated financial firms;

· Create a resolution and liquidation mechanism that would allow the government to seize insolvent banks, fire their board of directors and impose losses on unsecured creditors instead of relying on public funds to bail them out;

· Ensure much greater transparency in the derivatives-trading market;

· Create a new government agency, tasked with protecting consumers from predatory financial practices and products – to crack down on the fraud, corruption and greed in the finance sector, and especially the mortgage lending market that led to the global financial crisis.

UNI General Secretary Philip Jennings applauded the progress “The moment of accountability for the greedy fat cats who created the global financial mess is fast approaching,” he said. “Progress in America in restoring sanity and balance in the finance sector is essential for the broader fight to break through to a global economy that that is fair to working people everywhere.” Jennings urged affiliates to keep the pressure on their governments to advance this vision next month at the G-20 Summit in Canada.

The fight in the USA is not over.

Differences between the Senate bill and a similar bill advanced by the House of Representatives last year must now be reconciled in a conference committee made up of members from both houses of Congress and a vote on the final legislation must be held in both chambers. Wall Street, which has hired thousands of lobbyists and is spending more than $1 million per day to kill the reform, is not going to give up. Although defeating the popular bill is not likely, the big banks will do all they can to weaken the reform legislation. The trade union movement and progressive allies that have formed an organization called Americans for Financial Reform (AFR) have vowed to resist these efforts and to fight to strengthen the law.

Upon passage, the Executive Director of AFR said “Today the Senate is standing with the 8 million who lost their jobs and countless other Americans who lost their homes to foreclosure, savings and pensions because of the irresponsible actions on Wall Street.”

The devil in the details of the Senate bill

The 1,400-page Senate bill represents the most sweeping regulatory reform since the 1930s when New Deal legislation created the Securities and Exchange Commission and imposed a separation of commercial banking from investment banking (Glass-Steagall) along with a full range of laws to regulate banks and other financial institutions. Among the most important details:

Oversight: Creates an 11-member Financial Service Oversight Council made up of the heads of the key regulatory bodies, the Secretary of the Treasury and the Chairman of the Federal Reserve that will monitor and combat systemic risks to the nation’s financial system. A similar approach is taken in the House of Representatives’ bill (House bill).

Mortgage Reform: New, strict lending standards would be applied to all mortgage companies, not just commercial banks and thrift banks – all lenders would have to verify incomes and evidence of the ability to pay among borrowers. The same language is in the House bill.

Consumer Protection: The Senate bill creates a “Consumer Financial Protection Bureau” within the Federal Reserve that would broadly regulate lending and trading practices in the finance sector. This is weaker than the independent Consumer Financial Protection Agency included in the House legislation since it’s subject to control by the Federal Reserve and because its regulations can be vetoed by the proposed Oversight Council. (There is no veto in the House bill.)

Capital Standards: The Senate bill would boost capital requirements on banks with more than $250 billion in assets, but it would not impose a legal leverage ratio in the same way the House bill does – set at a 15 to 1 debt-to-net capital ratio. The Senate bill would leave it to regulators to set the allowable ratio.

Derivatives: Financial derivatives such as the so-called Credit Default Swaps that did so much to bring down the global economy would have to be traded on transparent, public exchanges and banks would be forced to exit the business of making markets for such derivatives. The House bill is weaker – it does not prohibit banks from trading in derivatives and it created many loopholes for certain types of derivatives to be traded outside an exchange, permitting those specifically designed to hedge risks rather to seek profits from speculation.

Ratings Agencies: Under the Senate bill, ratings agencies, which helped facilitate the financial crisis by giving high ratings to risky securities, would no longer be chosen by companies who create such securities – they would assigned to rate new financial products by a new independent board created by the government to avoid the conflict of interest that led to inflated ratings for junk securities. The agencies would also be held legally responsible for their ratings – with investors given the right to sue the agencies for negligence. The House bill increases financial liability standards, but does not create a board to assign rating agencies work.

Bank Restrictions: The Senate legislation would empower regulators to first study and then set restrictions on bank holding companies with commercial bank operations from engaging in speculative trading with their own accounts. This so-called Volcker Rule, named after former Federal Reserve Chairman Paul Volker who proposed it, is being fiercely resisted by Wall Street. The House bill has much weaker language, though it would allow the new Financial Services Oversight Council to ban such practices.

Executive Pay: Shareholders would be given the right to a non-binding vote on executive pay practices and the Federal Reserve would be given the authority to set standards on excessive executive pay – allowing it to deem objectionable practices as “”unsafe and unsound” for banks. The House includes the shareholder provision, but includes a weaker measure on regulating executive pay.

Key flaws in the Senate legislation

AFL-CIO President Rich Trumka characterized passage of the Senate bill as a “sweet victory” on 20 May, just three days after leading a massive rally in favor of reform on Washington’s K Street, home to hundreds of lobbying firms that Wall Street has hired to help it defeat and/or weaken reform. But like many progressives, he acknowledged the many flaws in the bill. The legislation must be strengthened in the House-Senate conference, he said, “especially when it comes to regulating derivatives along with private equity and hedge funds–which function as a huge, unregulated shadow financial system.”

Among the key weaknesses in the legislation:

· The Volker Rule, to limit banks from trading on their own accounts (often at the expense of their clients) and partially restore the protections of Glass Steagall, was denied a direct vote in the Senate; instead the Senate adopted a weaker provision that leaves the decision to regulators who have failed to reign in Wall Street in the past.

· A firm cap on the size and leverage ratios of banks and financial institutions fail was defeated in the Senate, demonstrating once again the outsized influence of Wall Street despite its role in the economic collapse.

· A requirement that non-bank financial companies register with and report on their activities to the Securities and Exchange Commission covers hedge funds, but not private equity firms. This is a huge loophole that would weaken the reforms.

· The Consumer Financial Protection Bureau was weakened by locating it within the Federal Reserve and subjecting its regulations to being overruled by the Oversight Council; and the Senate adopted a provision to deny state governments the right to impose stiffer regulations. The House bill’s Consumer Financial Protection Agency is much stronger and more independent.

· There is no Financial Transactions Tax to discourage damaging speculation and high-frequency trading of the kind that caused stock prices to plummet dramatically over 30 minutes in New York for unknown reasons earlier this month.

Despite the flaws, the Senate bill is a step forward. As AFR’s Booth remarked: “The bill will begin the process of reining in the unchecked speculation of the casino economy that caused the Great Recession and protecting consumers from fraud and abuse by financial institutions that siphoned billions of dollars from the pockets of workers into the hands of big Wall Street banks.”

On to the G-20 for reform

As the process for completing the legislation goes forward in the USA, the global labour movement must seize the initiative in June at the Canada G-20 summit. “The global financial system is too complicated and integrated for any one government,” UNI General Secretary Phil Jennings said. “The instability in the sovereign debt market of the eurozone shows once again that a global crisis requires a global solution.”