What to Watch on Wall Street

The Financial Reform package about to pass into law is far more that I expected us to achieve.  This editorial echoes the strengths and weaknesses of the bill that I outlined on Friday.  More important, it goes further.

There is much to applaud in the financial regulatory reform bill announced last Friday by House and Senate negotiators. It would limit some of the riskiest activities of banks and regulate the multitrillion-dollar market in over-the-counter derivatives. It would give federal regulators the tools, if they need them, to shut failing large banks and financial firms instead of bailing them out.

In significant ways, the bill would also protect Americans directly. Consumers would be shielded from many forms of abusive and predatory lending, and investors could be empowered to influence corporate boards that have long been impervious to shareholder concerns.

The bill is a considerable accomplishment. It is the final version. Congress should pass it quickly.

At the same time — and in the months and years ahead — lawmakers must acknowledge the bill’s shortcomings and be prepared to take corrective action. Many of the bill’s provisions come with exceptions or exemptions that could, in practice, swallow the new rules.

The reforms are also vulnerable to being weakened in the painstaking process of translating new law into actual regulations and procedures. Special interests — think Wall Street — have the resources and time to monitor and influence that process. The public does not. Lawmakers have to ensure the carrying out of the rules does not veer widely from what Congress has promised.

Take for example, the so-called Volcker rule, intended to reduce risk and speculation in the financial system. The Obama administration proposed banning banks from using their capital to invest in hedge funds and private equity funds. The final bill would let banks invest up to 3 percent of their high-quality capital in such funds, a big exception. Congress has to be prepared to reduce the percentage to control risks in the system.

Derivatives regulation also bears watching. The bill would require most transactions to occur on regulated exchanges, rather than as private contracts. Regulators and lawmakers must strictly monitor derivatives that trade off-exchange and stop that market from growing ever larger.

For all of the specific reforms, the legislation leaves intact a handful of behemoth, multitasking banks whose size and scope would make them difficult to dismantle in a crisis, even under a new law.

Congress is gambling that the reforms, taken together, will sufficiently reduce the banks’ riskiness. That could happen, but if it does, the banks will make considerably less money and will want relief from what they are sure to call overly burdensome regulation. When that happens — and if the reforms work, it will — lawmakers will have to stand firm, even though it means imposing pain on the banks. Equally important, if the big banks grow larger and riskier despite the new rules, will lawmakers impose stronger restraints? If they do not, it is only a matter of time before the next calamity… [emphasis added]

Inserted from <NY Times>

The Times’ editorial staff did an excellent job of describing just how this reform may be undermined. and outlining the steps needed to mitigate that.

Translation from legislation to regulation demands intense scrutiny.  For reasons that elude me to this day, Obama has left Bankster butt buddies Geithner, Bernanke, and Summers in the key positions.  I repeat my call for their firing and replacement.

The biggest danger we face is that some Democrats and all of the GOP are 100% Bankster bought.  They are being paid beaucoup bucks to look the other way.  We cannot depend on our elected officials to sound the alarm when abuses occur.  Most of the MSM won’t do it either.  They have their own agenda, and it’s decidedly right wing.  Sadly, that job falls to us.