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