Two nights ago author and New York Times columnist Aaron Sorken was the guest on the Daily Show, and he expressed concern that, essentially, nothing had changed since last year’s economic collapse. Many on Wall Street have admitted to the fact that the long held theory of “rational self-interest” proved to be flawed in our current financial system, and the problem is that hazardous business decisions are supposed to have an adverse effect on the person who is making them when they go south. With the current state of our economy and financial system, however, those people making the risky decisions are usually the last ones to feel the consequences.

Now that the dust is beginning to settle from last year’s nearly catastrophic collapse of the financial system, lawmakers are finally taking steps to prevent a recurrence of the risky business practices that were at the root of the disaster. Earlier today, the House approved to legislation that will significantly increase federal regulations on Wall Street and the financial sector as a whole. While the bill will also have to pass through the Senate, the passing of the legislation marks a major milestone for regulatory reform.

“House passage of this bill moves us an important step closer to meeting the President’s objectives for reform,” Treasury Secretary Timothy Geithner said.

After several months of debate and negotiations, the bill was finally ready to be put to vote today, winning by a margin of 223-202. There will undoubtedly have to be lengthy negotiations in the future, as the Senate and House bills contain some fundamental differences, including the structure for regulating the banking industry. In order for the bill to become law, the House and the Senate must compose a version that both sides can agree upon.

The House’s massive bill clocks in at over 1,300 pages and contains ten major provisions for regulatory reform. Here are a few highlights that are outlined in the new legislation:

New Agencies:

The Consumer Financial Protection Agency (CFPA) will be a new agency that will protect individuals from predatory practices of financial product and service providers. This problem has already been partially addressed with the CARD Act, which regulates the credit card industry and will go into effect in February.

In an effort to prevent the systemic risk of “too big to fail” institutions, there will also be a new inter-agency oversight council that will provide increased oversight to these firms. In addition, there will also be a new process instituted that will outline the procedure for handling these large banks that fail, such as AIG and Lehman, which doesn’t require bailouts or tax money.

Oversight:

Under the new legislation, company shareholders will have an input on matters such as executive compensation and excessive severance packages—the so-called “golden parachutes”. One of the principal contributors to the financial bubble that caused the crash was compensation packages which rewarded precarious investing—something that will be closely regulated under the new bill.

The main commodities that were being traded in these risky deals were financial derivatives. Up until now, these derivatives had been completely unregulated, but the new bill will require all trades to be processed on an exchange or electronic platform. One of the main problems with these derivatives was that despite being high-risk commodities—now referred to as “toxic” in financial circles—they received an AAA rating from the credit rating agencies. The new bill will reduce the role that credit agencies play in influencing investors and the market to prevent similar unwarranted faith in the future.

Increased Consumer Protection:

In addition to the newly created CFPA, there will also be new protections but in place to safeguard investors. The current financial regulator, the Securities and Exchange Commission, will be given increased jurisdiction so that it can better protect investors and regulate the markets. Traditionally hedge funds have been exempted from regulation due to perceived proprietary information. In lieu of several Ponzi schemes—Bernie Madoff, most notably—there will now be a requirement for fund advisors to register with the SEC.

The main cause of the housing bubble was a slew of ill-advised home loans, such as NINA and NISA, which were devised to lend exorbitant amounts of money to unqualified lenders. The new bill would be reinstating the standard that had been in practice until the last decade or so: make sure that borrowers have the means to repay their loans.

Although these new regulations have the potential of reforming a plagued financial sector, in the end companies have to put some of the onus on themselves. There are always going to be ways for financial institutions to break the law and circumvent the system, and until they start recognizing the necessity of rational self-interest in a capitalist economic system, we will be stuck in a cycle of inflating bubbles and the ensuing recessions.

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