The Biggest Winners in the Financial Regulation Overhaul

With the passage of the Dodd-Frank financial regulation reform bill by the Senate on Thursday, Congress has tried to resolve some of the most pressing problems left over from the financial crisis. The effects will clearly be sweeping, even if not all quite predictable. But at this early point, here's a rundown of some of the biggest likely winners from the legislation.

Too-big-to-fail banks: Cornelius K. Hurley, director of the Morin Center for Banking and Financial Law at Boston University, says too-big-to-fail "not only wasn't cured but it was enshrined."

Six institutions -- JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Morgan Stanley (MS) and Goldman Sachs (GS) -- are now much bigger than they were before the crisis. Since the market knows the government will never let them go under, creditors lend them money at lower rates than other banks get, which is a form of taxpayer-backed subsidy, Hurley says.

'The gap between these big six and everybody else, whether it's a regional bank or a credit union, will only get wider and wider," Hurley says. "They won big time."

Thomas F. Cooley, a professor of economics at the New York University Stern School of Business, takes a slightly different view, saying "a lot will depend on implementation," meaning how the final rules for big banks are written by regulators.

Cooley, the co-author of a new book called Regulating Wall Street: The New Architecture of Global Finance, lauds the bill for putting into place a number of mechanisms for the orderly liquidation of large, risky firms that becomes insolvent. The bill also call for the Federal Deposit Insurance Corp. to get involved with the liquidation of large firms in much the same way it does now with small banks.

Consumers: The bill creates a Consumer Financial Protection Bureau that will consolidate the consumer protection functions of a half-dozen federal agencies in a new department with an independent director set up within the Federal Reserve.

"This should give people more security in many of their transactions, most importantly mortgages," says Dean Baker, co-director of the Center for Economic and Policy Research, a Washington, D.C., think tank The agency will ensure that mortgage and credit card agreements are written in clear and easy-to-understand wording and that past abuses, such as disguised escalating interest rates, are outlawed.

But Alex J. Pollock, a senior fellow at the American Enterprise Institute, says the new consumer bureau will be "an aggressive, extremely intrusive, extremely expensive bureaucracy."

Auto Dealers: While creating the new consumer protection bureau, Congress exempted dealers from its rules. "This is a big thing," says Baker. "People can't count on getting a fair deal from their car dealers. For most people, a car loan is their second-largest loan after their mortgage."

Retailers (and Indirectly, Consumers): Credit card companies and banks made an estimated $48 billion in debit card fees last year. Under provisions of the financial reform bill, new limits to be determined by the Federal Reserve will be placed on the amount banks can charge retailers for processing debit card transactions. The former practice of charging 2% of the total transaction "was really a scam," says Baker.

Fannie Mae and Freddie Mac: These two government-owned companies, which guarantee about $5 trillion in home mortgages, have lost upwards of $300 billion, and the red ink is likely to get deeper. But they weren't considered in the legislation.

"One of the biggest causes of the financial bubble and crisis that followed was not addressed in the bill," says Pollock. He wants Fannie and Freddie broken into three parts: a trust to absorb the losses, private companies to take over the profitable portions of the two firms and a government agency to manage the subsidy function.

Money Center Banks: Some of the early proposals for the financial overhaul called for banks to be banned from using derivatives, which are financial instruments based on underlying transactions such as stocks or bonds or commodities. But the bill was watered down in the final compromise, and banks will continue to be allowed to use interest rate swaps and other derivatives to hedge their risks.

"Banks use derivates for one of two things: manage risk or gamble," says Cooley. "Congress was concerned about the gambling part." These risky derivatives, such as those based on gold and corn, are going to be forced onto organized exchanges, which should help promote transparency, Cooley says.

Some trades will be spun off into separately capitalized parts of the banks behind a Chinese wall, which should help insulate taxpayers from the kind of disaster that happened at AIG, which received a $185 billion taxpayer bailout because derivatives losses threatened to push the company into bankruptcy.

Derivatives Clearing and Trading Platforms: These include the CME Group (CME) , which is four derivatives exchanges, and Intercontinental Exchange (ICE), both of which will see a major boost in business thanks to the reform, Cooley says.