A Practical Guide to the Let’s Not Let Our Largest Donors Embarass Us Again Act of 2010

By Cato the Elder

bankingqueenLet’s begin by saying that we need to see how the actual language ends up being written before we call any element of FinReg good or bad (or somewhere in between).  Secondly, I’d invite you to read the HuPo’s take on it here as it has merit.  For those of you who are afraid that reading the HuPo will cause your eyeballs to spontaneously combust, don’t worry because I’m going to quote the more lucid observations. 

 
Let me preface by saying that I find very little in this bill that will do anything immediately, and am actually quite shocked at the amount of leeway given to the regulators as opposed to being codified.  This could be a good or a bad thing, as it leaves the regulations to the regulators which means that you’re going to see them change depending upon which party has control of the regulatory structure. It’s a question of whether you want to see the financial well-being of the country in the hands of feckless bureaucrats who are serial failures when it comes to preventing meltdowns or 535 elected dumbasses most of whom can’t even balance their own checkbook.

 
Damned if you do, and damned if you don’t.  I’ll take the 535 elected dumbasses, as at least I have an easier time getting rid of them and hey, even a blind squirrel finds a nut once in a while.  And, things would be in black and white, giving us some sense of certainty.  As it stands, we’re not going to know what a lot of these regulations look like for quite some time because Congress kicked the can to the regulatory authorities on a lot of issues. 

 
Having said all that, let’s get to some of the more important aspects of the bill:

 
1.) Banks will have to spin off some, but not all, of their derivatives business. More to the point, they lose the CDS, but get to keep forex and rate swaps in-house due to the “custom” nature of these products (“custom” being a euphemism for being able to continue to screw the consumer of such products by obfuscating the pricing mechanism). Advantage: Wall Street.

 
2.) Increased capital requirements. Overall, this is good.  However, the fact that the capital doesn’t extend to all unsecured lending is bad.  Sometimes, when you compromise on an issue you end up with something that doesn’t do very much for either side, and this is one of those times. Advantage: None.

 
3.) It appears that language that would prevent future Goldman type Abacus transactions has survived.  They still can hedge market risk, but they can’t blatantly take positions opposite of their customers.  Again, I want to see the final verbiage but right now this is in the “good” camp. Advantage: Consumers.

 
4.) Ratings agencies. This part was relatively well done, in my view.  The ratings game has long been one of the most rancid elements on Wall Street, and now they have some liability. Advantage: Consumers.

 
5.) The Volker Rule got its teeth kicked in.   From the HuPo: “The two most high-profile provisions were the last items to be considered. Neither emerged intact. One would have forced banks to stop trading financial instruments with their own capital and give up their stakes in hedge funds and private equity funds, named after their original proponent, former Federal Reserve Chairman Paul Volcker. The other would have compelled banks to raise tens of billions of dollars because they’d have to spin off their derivatives-dealing operations into separately-capitalized affiliates within the bank holding company, pushed by Senate Agriculture Committee Chairman Blanche Lincoln. As currently practiced both activities are highly lucrative, annually generating billions for the nation’s megbanks. Ultimately, despite widespread approval among those pushing for fundamental reform in the wake of the worst financial crisis since the Great Depression, yet perhaps aided by near-unanimous revulsion among those on Wall Street, both were watered down in front of C-SPAN cameras beginning around 11 p.m. ET. Democratic lawmakers had been rushing to complete the bill by Friday morning under a self-imposed deadline. The final vote was recorded at 5:40 a.m. The conference began their final day just before 10 a.m. on Thursday. After days of leaks to the news media that the Senate was looking to ease the restrictions, on Thursday afternoon Senate conferees confirmed the rumors: banks could invest up to three percent of their tangible common equity in hedge funds and private equity firms. Tangible common equity — considered to be the strongest form of bank capital — is comprised of shareholder equity. A few hours later, the Senate amended its proposal, changing the metric from tangible common equity to Tier One capital. Banks have more Tier One capital than they have tangible common equity, so changing the requirement to the weaker form of capital allows banks to invest more of their cash in hedge funds and private equity funds. The concession was confirmed by Steven Adamske, spokesman for House Financial Services Committee Chairman Barney Frank.”

 
The 1.5 – 3 increase was the work of Jamie Dimon and JPM, so the firm could keep it’s investment in a mega hedge fund.  In other words, banks are still free to take deposits with their left hand and roll the dice with the right.  Advantage: Wall Street.

 
6.) Proprietary trading. This is basically a punt.  Again, from the HuPo: “As for the measure’s proposed ban on banks trading with their own money, also known as proprietary trading, the agreed-upon provision calls for federal financial regulators to study the measure, then issue rules implementing it based on the results of that study. It could be anything from an outright ban to a barely-there limit.”

 
So, here again the banks are off to the races with huge reserves and unlimited discount window usage in the never ending quest to blow themselves up. Advantage: Wall Street.

 
7.) Institutionalizing Too Big To Fail. The bill creates a de-facto TBTF standard for larger institutions, which is why you didn’t see a huge organized lobbying campaign to kill the bill.  This is actually good for them, as they now have a huge competitive advantage over the regional players.  Advantage: Wall Street.

 
8.) No Freddie and Fannie.  I simply don’t understand how you can have a serious reform effort and not address these two miscreants.  Terrible. And it’s because the banks went bezerk when they found out that they might have to face the music and own up to their part of interacting with Fannie/Freddie. Advantage: Wall Street.

 
In summary, there are a few bright spots, but in the end this is a Macbeth bill. It is a tale told by an idiot, full of sound and fury, signifying nothing.  Thus ends a long sham political theater process in which not very much got accomplished. For the most part, this bill achieves nothing and will prevent nothing, along with virtually insuring that Wall Street will blow up again by codifying TBTF.

 
But before quadrillions of fake money will collapse and the world finally ends for good, you can rest assured that Baracks Teleprompter™ will be front and center repeatedly reminding the morons voting public of what a historic bribe he took achievement this is. 

 


Comments

  • Brian S says:

    Have fun reading another 2000 page bill.

  • James Young says:

    Don’t know about the analysis, but I love the illustration!

  • Dan says:

    I count more “Advantage: Wall Street” sections than “Advantage:Consumers” sections in your analysis. Not surprising. These guys know who their masters are.
    .
    The headline on Bloomberg immediately after the bill cleared conference was “Banks ‘Dodged a Bullet’ as Congress Dilutes Rules”.
    .
    Sums it up nicely.

  • Credo says:

    I need to wash my eyes out after that image of Barney.

  • An opportunity missed.

  • Let's Be Free says:

    If you loved the ICC and adored the CAB, if you long for reinstitution of FCC hegemony over the telecoms, if you laud the SEC, the Federal Reserve Board and the Comptroller of the Currency for their perspicacity leading up to the financial meltdown, and if you believe that Elizabeth Warren and Tim Geithner understand how to create free and open markets that reap the benefits of competition, then you will salute smartly and support this bill. If you believe in the wisdom and sincerity of regulators who focus one eye on the needs of their political sponsors, while their wandering eye looks to reaping riches in their post-regulatory, post-governement career, then your support will be unconditional. For the rest of you, caveat emptor.

    T’is interesting that Glass Steagal ran less than 50 pages and (with limited amendment) operated effectively for 65 years. With its 2,000 pages, this bill must be 40 times as good.

  • Cato the Elder says:

    “An opportunity missed”
    *
    Got that right. It’s pretty amazing how both conservatives and progressives were in philosophical agreement for the most part about what should be in a good reform bill. The fact that none of it seemed to survive or make it in to begin with tells you just how bought and paid for these guys are.

  • pgreer says:

    Tis a shame they wasted this opportunity like they did health care.

  • Loudoun Insider says:

    From the title I thought this would be about Cuccinelli and the US Navy Vets scam charity!

  • Cato:
    Yeah, the “bought and paid for” factor is robbing me of a lot of my enthusiasm for politics. “A pox on both your houses,” is seeming like the height of political wisdom to me these days.

  • edmundburkenator says:

    Was doing nothing better? Or worse?

  • Cato the Elder says:

    Ed, the best thing I see in here is liability for the likes of S&P, Fitch, etc. That’s a good thing. Increased capital requirements are good, too (but all the exceptions are not). The short answer is that it’s better than nothing, but considering what we went through from 2008-09 (and have apparently learned nothing and/or chose to keep our collective heads firmly ensconced in our rectums) I expected more. A lot more.

  • tx2vadem says:

    Why did you expect more? Lobbying groups have a lot of power. And even more so when it comes to complex topics such as this. The public may have diffuse rage about the issue. But it is not focused to a point where people could have fought on the level of the ABA. The fact that there was more transparency and that didn’t change the outcome demonstrates this for me.

  • Cato the Elder says:

    “Why did you expect more?”
    *
    I thought that people may have been “scared straight” from the near death experience. Silly me.

  • Why expect more? You’d think reality would penetrate these peopel’s mooney-lined cocoon at some point, wouldn’t you? We’re just had a major system failure. Reasoanble, logical, honest legislators would be about fixing that problem.

  • Loudoun Insider says:

    Steve, “reasonable, logical, honest legislators” are far and few between in Congress. Unfortunately. My enthusiasm for all this political stuff is waning fast.

  • LI: I hear you. Notice that both the progressive wing of the Democratic Party and the conservative wing of the Republican Party are basically in revolt against the party power structure. In both case, largely because they believe that the middle is bought.

  • G. Stone says:

    Was doing nothing better? Or worse?

    edmundburkenator

    When it comes to the Federal Gov’t,doing nothing is the answer.

  • Dan says:

    Stone, is that a serious comment? You honestly think nothing needs to be done with regard to financial regulation?
    .
    That is breathtaking.

  • tx2vadem says:

    “I thought that people may have been “scared straight” from the near death experience. Silly me.”
    *
    The same people who want to create a *new* billion, if not trillion, dollar derivative market to “mitigate” climate change?
    *
    Incidentally, I loved the “and the firms would be allowed to hedge ‘for the banks’ own risk.’” I can see this argument before regulators: “I’m JP Morgan, and my risk is the entire economy. So, I can bet on (er, hedge) the entire amount of crude supplied in a day.” As I recall, this is how so many people got into the crude futures market to begin with.

  • Cato the Elder says:

    “I’m JP Morgan, and my risk is the entire economy”
    *
    I almost chuckled at that before I realized how likely a scenario it is..

  • Lulu U. Parsnips says:

    You better watch out showing those pictures. Benji is going to soil his panties!

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