Will Financial Reforms Prevent the Next Crisis?

By Daniel Wagner & Stevenson Jacobs, AP Business Writers

WASHINGTON (AP) — The most sweeping changes to financial rules since the Great Depression might not prevent another crisis.

Experts say the financial regulatory bill approved by the Senate last week, and a similar bill that passed the House, include loopholes and gaps that weaken their impact. Many provisions depend on the effectiveness of regulatory agencies — the same agencies that failed to foresee the last crisis.

A big reason for the bill's limitations is that banks and industry groups lobbied against rules they felt would reduce their profit-making ability.

The financial sector's influence in Washington reflects its enormous donations and lobbying. Over the past two decades, it's given $2.3 billion to federal candidates. It's outdone every other industry in lobbying since 1998, having spent $3.8 billion.

Here's how the bills, which must be reconciled and approved by the full Congress, might address some causes of the financial crisis, and some of the bill's perceived weaknesses:

DERIVATIVES

The problem

Banks used these investments to make speculative bets that helped inflate the housing market. Once home values crashed, these derivatives — and related side bets — magnified the financial crisis.

The value of a derivative depends on the price of an underlying investment. Examples include corn futures, stock options and mortgages.

The solution

The legislation would, among other things, require that many derivatives be traded on exchanges, as stocks are, so they are visible to regulators.

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