After a year of intense protest and struggles on one side, and bank lobbying on the other side, Congress yesterday passed Wall Street reform, securing the second major piece of reform legislation on President Obama's agenda.
The bill curbs some financial hanky-panky, establishes a consumer financial protection agency, and adds new regulation of big financial institutions.
A major cause of the financial crisis was too many undocumented, or worse, fraudulently documented derivatives. The package includes new restrictions on the sale of these products. Derivatives are basically insurance designed to hedge risk. If you are a farmer who just invested heavily in new see, or farm equipment, you might want to buy a "derivative" that will pay off some of your losses if you run into bad weather. If you are a trucking company dependent on fuel, you might want to buy a "derivative" in case fuel prices unexpectedly rise. The new legislation provides that most derivatives must now be sold on exchanges where the documentation that shows what kind of real assets are behind the derivative can be inspected.
A consumer financial protection agency charged is created charged with protecting the public against fraudulent financial services. This is a big step forward, especially for the millions of homeowners who were sold very flaky mortgages and steered into high-interest, high-fee credit cards.
The creation of a resolution authority for large non-bank financial institutions is a positive step. It removes much of the regulatory confusion that complicated the initial steps by the Federal Reserve and Treasury to stem the crisis when the failure of Lehman Brothers and A.I.G was imminent, and that led to the very unpopular bank bailouts.
A big hole in the resolution authority is the fact that no pre-funding mechanism was put in place. That will await future legislation. A tax on the biggest banks and a transaction tax on all financial services are among the proposals.
The bill includes an audit of the Federal Reserve's special lending facilities, as well as ongoing audits of its open market operations and discount window loans. This is a big step towards increased openness of the nation's banking system.
The big question is: will this reform really prevent future crises? The answer is: it will probably help, but key issues remain unaddressed.
The "Volker rule" - former Federal Reserve Chair Paul Volker's proposal to break up big banks - did not make it into the bill, raising the risk of future capture of the regulators by the big banks.
Other steps did not get included that would have removed clouds from the future.
These include placing all derivatives in public exchanges, separating investment from commercial banking operations, and guaranteeing independence of the new consumer financial products regulation from the Federal Reserve (which is still a quasi-public institution of bankers).
But, considering the powerful forces lobbying Congress against any reform - the bill is an important victory for Obama, and for forces seeking to protect public institutions from being held hostage by banks and their risky adventures making money at democracy's expense.
But the settlement of Goldman Sachs' criminal trickery in the derivative business, which netted them billions in fees, for a fine equalling four days of its profits, sends an uneven message, to say the least.
The battle is not over. Workers have not lost. But they have not yet vanquished the dangers.