Financial Reform, A Mission Accomplished (Almost)

Deserves a Cookie!

Finally a piece of financial reform legislation has been cobbled together, unifying Senate and House variations into one common bill that will cause a certain amount of structural adjustments among firms with over $50 billion in assets. It's taken a while, given the turmoil that nearly collapsed the economy occurred in 2008.

This bill goes unsupported by most Republicans, though Massachusetts Senator Scott Brown, much applauded by Republicans when he unexpectedly won the Kennedy's seat earlier this year, is turning out to be more responsible than your average Republican.

The bill is expected to have enough support to become law. Both chambers plan to vote next week. The margin in the House and Senate will likely be close because most Republicans are expected to oppose the measure.

If the bill passes, President Barack Obama is expected to sign the package into law by July 4. Thursday's agreement also gives the president leverage going into a weekend summit of world leaders in Canada, where he will prod other nations to rewrite their rules.

(WSJ)

Expect to hear a great deal of hyperbole from those against the bill, and how the heavy hand of government will lead to failing banks and higher expenses for us all. Ignore that.The number of banks and credit unions in the country is huge, with only a few firms of a certain size impacted by some provisions. The big banks can raise fees or pass along only so much before people switch their money to credit unions or smaller banks. Or before some wise entrepreneur comes along and forms a new bank to target a neglected market.  That's how capitalism works.

The legislation is pretty broad, and in the home mortgage arena, the source of all our woes, it extends changes in lending requirements initiated by the Federal Reserve in 2008.  It forces lenders to verify income, credit and job status on all borrowers, according to the Wall Street Journal. The earlier Fed adjustments along these lines were limited to sub-prime. It would also ban putting people into bad loans.

The root cause addressed, the legislation goes on to make a bunch of changes intended to limit the risk inside our larger financial institutions. Hedge funds and PE firms--which really were no factor in our financial meltdown--nevertheless get their wings clipped a little by being forced to register with the SEC, and more damaging, periodically disclose their positions. We imagine a certain amount of fraud and unintended shenanigans from that provision as people look to capitalize on the revealed holdings of these firms. We wonder if there is some time delay on what has to be revealed, or if it will be real time disclosures of current positions.

We've pointed out in the past Republican double speak over the provision that would have forced the banks to fee up in advance to cover potential collapses and unwinding of firms that might damage the financial system. That was called a "taxpayer bailout", even though, well, it's the virtual opposite. That provision was tossed, and instead using "no taxpayer funds", but government money up front (what? how?), fees will be collected from banks after any liquidation activity. Just like the Republicans wanted. But, just in case you are not paying attention, they still are uniformly not supporting the bill. All they managed to do was increase government liability by refusing to charge solvent firms a miniscule fee during good times to create a liquidation fund, in order to try to collect a fee after a potentially cataclysmic financial event. That makes a lot of sense.

Of course because Republicans have not voted for the bill, the potential stupidity of that provision will fall on the heads of Democrats, with future Republicans pointing the finger with a revisionist flourish.

The bill limits prop trading by banks, limits their investment in prop traders (meaning hedge funds), normalizes the trading of some derivatives to exchanges open to all, and forces banks to push their more esoteric derivatives trading into fully capitalized affiliates.

Again, while derivatives did not initiate our meltdown, derivatives did play a part in allowing large parties to greatly increase systemic risk when there was no systemic risk financing structure in place beyond the taxpayer.

This is a good piece of legislation that addresses the practices of businesses, individuals and governments and that is as it should be, giving the joint participation of all three in the economic meltdown.

The final vote is supposedly next week. We watch and wait.