Finance Reform: What’s in the Package

The conference committee is done.  Here’s an overview what the bill that will return to the House and Senate for possible ratification.

Instead of my usual format, I shall indent my own comments in blue within the article itself.

…Here is a brief look at the bill’s main provisions:

SWAPS PUSH-OUT: Wall Street firms that dominate the $615-trillion over-the-counter derivatives market would have to spin off dealing operations in some swaps, but could keep many swaps in-house, including derivatives to hedge their own risk.

Much OTC derivatives trading would be redirected through more accountable channels such as exchanges and clearinghouses. Many OTC contracts end-users could carry on as before.

This has a huge loophole, because it allows Banksters to continue top secretly manipulate the derivatives market, out of the public’s eye.  I understand Chris Dodd aided the GOP in inserting the loophole.

VOLCKER RULE: A new rule would bar proprietary trading by banks for their own accounts unrelated to customers; limit the growth of the biggest banks; and curb banks’ involvement in private equity and hedge funds, except for small investments allowed by a loophole added to the rule late in debate.

Some big banks’ profits would be pinched by both the Volcker rule and the Lincoln swaps plan, with a few Wall Street giants potentially facing structural changes.

Except for the loophole, this is excellent.

WALL ST ‘DEATH PANEL’: Aiming to prevent massive bailouts like AIG’s and disastrous bankruptcies like Lehman Brothers’, the bill calls for a new government "orderly liquidation" process for financial firms on the verge of collapse.

Authorities could seize and liquidate them, with costs covered by sales of assets and fees on other firms if needed.

I like this provision, but I’m concerned that, given another GOP meltdown, these TBTF banks will not have sufficient assets to cover the costs, burdening taxpayers again.  Furthermore, I consider it likely that before such a process can begin, Banksters will have gutted the banks and run, leaving oblt the right side of the balance sheet.  We should break up the TBTF banks now.

CONSUMER WATCHDOG: Protection of financial consumers would be enhanced by increased government regulation.

The bill would set up a new bureau in the Federal Reserve to regulate mortgages and credit cards. The watchdog has sharp teeth, but couldn’t bite car dealers, who won an exemption.

Before I can comment on this, I need to confirm that the bureau is an independent entity, despite its location within the Fed.  If so, I’m all for it.

THE BIG PICTURE: A new council of federal regulators would try to monitor the entire financial forest, not just the trees. High-risk firms could be singled out for stricter policing.

The devil is in the details here.  The quality of this provision will not be apparent until we see how it is implemented.

BEHIND THE HEDGE: Private equity and hedge funds would have to register with regulators and open their books to scrutiny. Not so for venture capital funds, which would be exempt.

This is mixed.  Overall it’s the right move, except that venture capital firms should not be exempted.  How much do you want to bet that private equity and hedge funds will restructure themselves as venture capital funds?

INSURANCE COPS: The first federal monitor for state-policed insurers would be formed. It’s not federal regulation — yet.

We’ll have to wait and see.

BANK CUSHIONS: Banks would have to set aside more capital to ride out tough times, but will get several years to comply.

How much more capital?  Several years is much too long.

FED SCRUTINY: The Fed’s emergency lending during the crisis would be reviewed, but not its decisions on interest rates.

This is mixed.  All Fed activity should be reviewed.

DEBIT CARDS: Fees charged on debit card transactions would be reduced — a victory for retailers over the banks.

I support this, but I wonder if banks will just start charging annual fees on debit cards, and I doubt that most retailers will pass the savings down to consumers.

Inserted from <Reuters>

I think that the Democrats gave far too much away to Republicans in conference, but the bill contains too many benefits not to support it as a first step toward financial form.  Like health care reform, we have a lot more work to do.