How the Wall Street Reform Bill Regulates Derivatives

The U.S. Senate Committee on Banking and Housing approved a financial reform bill titled 'Restoring American Financial Stability Act of 2010', in March of 2010.(3) The bill was released by Senator Christopher Dodd (D) and did not initially garner enough votes to pass through the Senate in late April of 2010. A no vote from Senate Majority Leader Harry Reid (D) however, allowed the bill to return to the Senate according to an April 26, 2010 Reuters report.(1) In early May, the bill once again became active in the Senate as Democrats attempted to rally enough votes to pass the bill.

Among the objectives of the financial reform bill is the regulation of derivatives, financial instruments that's value is derived from underlying commodities or assets. Out of control derivatives spending is a culprit that led to the collapse of the U.S. Housing Market that began in 2007, and subsequently to massive financial assistance to large U.S. Banks deemed too big to fail. The Restoring American Financial Stability Act of 2010 was designed to prevent similar scenarios from becoming as damaging to the U.S. economy in the future.

The original bill's text sought to extend the capacity and reach of financial regulation including insurance of derivatives, oversight and requirements of banking holding companies,  derivative security swaps,  corporate executives compensation, hedge fund administrative laws and risk reporting, and higher operating standards for derivative markets. The bill also aimed to create a Financial Stability Oversight Council to improve financial stability via risk management.  The U.S. Senate Banking Committee summarized the bill into 8 objectives including "Transparency and accountability for exotic instruments', investor protection, and closer supervision and oversight of large companies.(2)

After the Restoring American Financial Stability Act of 2010, revisited the Senate, it became clear that further negotiations would become necessary in order for the bill to pass. Of the adjustments considered for the bill was an Amendment to the bill that had been proposed by Senator Barbara Boxer (D) of California before the bills first Senate rejection. This amendment aimed to eliminate tax payer risk for the mistakes of large derivative trading institutions that are too big to fail.(4) This increases the accountability of derivative trading institutions via the same standards applicable to smaller companies i.e. liquidation upon failure according to Daniel Indiviglio, in a May 1, 2010, Atlantic.com report.(5)

The Restoring Financial Stability Act of 2010 was not the only attempt at regulation of derivatives as other bills with the same objective had also been proposed including  the Wall Street Transparency Act set forth by U.S. Senator Blanche Lincoln (R) from Arkansas;  and the Accountability Act of 2010 and the Derivative Trading Accountability and Disclosure Act, proposed by Representative Michael McMahon (D) of New York. This latter bill was still waiting for House of Representatives Committee approval at the time the Senate Banking Committee's bill was being debated in the Senate. Evidently, the Senate Banking Committee bill advanced by Senator Dodd, became the regulatory bill to be debated.

Financial regulation of derivatives, an Obama administration agenda priority, is believed by many to eventually pass. This would put a Democratic spin on the trading, risk management, and regulation of financial derivatives that won't necessarily fuel the industry or provide excessive liquidity for derivatives markets, but intends to prevent financial derivatives from becoming a catalyst for financial meltdown.  The bill attempts to protect the American people, and the U.S. economy from collapse and perhaps bypasses the drivers of market ingenuity and capitalization of banking erudition within the derivatives market.

Sources:

1.  http://bit.ly/cHRLRd (Reuters)
2.  http://bit.ly/aTYdIO (Senate Banking Committee bill summary)
3.  http://bit.ly/aSA2qg (Senate Banking Committee Bill)
4. http://boxer.senate.gov/en/press/releases/042010a.cfm
5. http://bit.ly/ccrICe (The Atlantic.com)

Finance Professional Assess the Tax Implications of Obamanomics

Tax implications of Obamanomics and the 'trickle up economics' the President supports are directed at several key economic concerns. Primarily, these are 1) reducing the Federal budget deficit, 2) reducing the tax burden on middle class families, 3) economic growth 4) environmental sustainability, 5) Health care and education reform and 6) simplification of tax code requirements. These goals require legislative acts that have significant affect on taxation of individuals, families, and businesses.

Legislative changes to taxes

A recent legislative act of congress signed into law by President Obama is the 'American Recovery and Reinvestment Act of 2009'. This act has several tax provisions consistent with 'Obamanomics', and President Obama's 2008 tax plan campaign. Among the provisions within the Act are the following:

• Tax credit for production of renewable energy
• Continuation of first time home-buyer tax credit to 12.01.09
• Unemployment income deduction up to $2400.00
• Income and cost limited new vehicle sales tax deduction
• Introduction of an income tax credit
• Child tax credit increase for 2009 and 2010
• Tax credits for businesses

Of the changes in the American Recovery and Reinvestment Act of 2009 , several are only temporary. This is so they can provide short-term relief to various parties until the economy improves. It also assists Government itself through numerous Federal monetary allocations; for example Title VIII of the act addresses health and education related programs. More specifically, the Act addresses environmental reform, lower tax burden for unemployed, low income and other taxpayers. by providing financial assistance and tax relief, however it does not fulfill the Presidents aims of budget deficit reduction.

Changes to taxes can also affect the federal budget which is financed by taxes. When taxes can't pay for the budget, the government accumulates a deficit. Depending on whether this deficit is measured as a percent of gross domestic product or in actual dollars it can seem like different sizes.

In the first phase of Obamanomics, tax relief will negatively affect the federal budget, after which, increases to some taxes are forecasted to be implemented when the economy is less likely to suffer from those changes. Moreover, a greater amount of tax revenue can be collected from a strong economy than a weak economy hence the higher initial cost of economic stimulus for taxpayers in general. This will likely require some sound financial decision making by the Federal Government.

Economic effectiveness of Obamanomics' tax adjustments

According to a March, 2009 Wall Street Journal article entitled 'In Defense of Obamanomics', Laura D'Andrea Tyson illustrates the Obama economic vision could reduce the national budget deficit by hundreds of billions of dollars, and is not really worse than it has been in previous administrations in terms of top tier income tax and deduction percentages.

Tyson states the goals of Obamanomics are dependent on the U.S. economy reaching specific benchmarks. After the U.S. economy reaches projected growth points, adjustments to taxation will yield the financing necessary to reduce the budget and help carry out Obamanomic objectives. These objectives necessitate adjustments to taxes yielding tax implications that affect several strata of the U.S. economy, some of which are listed below:

• Refundable tax credit financed from Federally issued carbon emission permits
• Higher tax on top 3% of wealth recipients
• Lower tax on middle class
• Higher Capital gains and dividend tax for upper class
• Limitations on tax deductibility of dependents
• Expanded annual tuition tax credit

The economic goals and means by which those goals are to be carried out, are evident in President Obama's aforementioned 2008 tax plan. In order for these objectives to be achieved, Congress would need to pass additional legislation that approves executive budget proposals, and implements changes to U.S. taxes and Government programs. A few of the changes projected by Obamanomics are as follows:

• Reduce deficit as percentage of GDP
• Sustain federal programs such as Medicaid and Medicare
• Lower carbon emissions
• Increase energy efficiency
• Finance tax refunds
• Job creation
• Small business assistance

Tax implications of Obamanomics are wealth shifting in effect. While the full extent of Obamanomics has yet to be carried out through multiple legislative Acts, the intent and goals of the economic vision are quite clear. By stimulating the economy, the administration hopes to lead the country into a more prosperous state through economic adjustments aimed at both working and middle class benefits, environmental sustainability and small business assistance.

According to Lori Montgomery, a Washington Post reporter, the White House has confirmed the national budget is projected to continue deficit spending into the trillions of dollars for the next few years. This forecasted national budget will possibly either lead to budget cuts and/or increased taxes. Individuals, families and large businesses that comprise the higher tiers of American wealth are more likely to see tax increases following the expiration of tax cuts from previous years.