The financial overhaul bill: brought to you by Dodd and Frank
I hope that this isn’t another bill we’ll have to pass to find out what’s in it. But that appears to be the case.
The much-touted compromise that’s finally been reached is an agreement mostly among Democrats. A spokesperson for Republicans, Judd Gregg of New Hampshire, says:
“This legislation is a failure on both counts,” Sen. Judd Gregg (R-NH) said in a statement that denounced the compromise as failing to address “shoddy underwriting practices” or problems with the government-sponsored entities Fannie Mae and Freddie Mac. “It will not encourage much-needed stability and confidence in our financial markets. It will not significantly reduce systemic risk in our financial sector.”
Here are some of those rumored changes involving derivatives:
…[F]inancial houses could continue interest rate, currency, gold and silver derivatives trading, as well as to hold derivatives that offset balance sheet risk. They are still required to “spin off only their riskiest derivatives trades, including particular forms of credit-default swaps, which are complex financial bets that exacerbated the financial crisis…In addition, banks will have two years to spin-off their derivatives trading, and can retain the operations under independently capitalized affiliates. This latter might do some good if it keeps the riskiest products off the balance sheets of the biggest banks ”” effectively creating a good bank / bad bank situation in advance…
And oops—getting back to my first sentence—there’s this, from a “teary-eyed” Chris Dodd of Connecticut, who sponsored the bill and whose name it bears, along with that of Barney Frank (there goes that word “ironic” again, because both are widely felt to have been instrumental in creating, supporting, and defending many of the conditions that led to the meltdown in the first place, especially the Fannie/Freddie excesses) [emphasis mine]:
It’s a great moment. I’m proud to have been here…No one will know until this is actually in place how it works. But we believe we’ve done something that has been needed for a long time.
We may not know how it will work, but the Wall Street Journal has helpfully provided a guide to its best guess at the provisions. I am not one who believes in completely unfettered laissez-faire capitalism, but I must say that I am extremely distrustful of the federal government’s (much less any bill designed by Chris Dodd and Barney Frank) ability to regulate financial institutions in a way that will not make matters worse. The fact that this bill ignores Fannie/Freddie does nothing to allay my fears.
If you take a look at the comments to the WSJ article, you’ll see that many remark on the latter omission, plus a chilling effect this bill might have on the mortgage market in general. I have no way to evaluate predictions such as this one by commenter “David Eyke,” for example, but those of you with greater expertise can talk amongst yourselves:
“PRE-EMPTION: Would allow states to impose their own stricter consumer protection laws on national banks. ”
This will make national mid-tier banks obsolete eventually. They won’t be able to afford to comply with disparate laws in fifty states in twenty years. The result will be we will be left with a few massive banks with the resources to comply with disparate rules and … credit unions.
Time to sell 5/3 and others of that size range. In time, our money supply will be almost completely dependant [sic] on four super banks.
There’s more in this article in The Street. One point it mentions is that the bill would re-institute a version of the Glass-Steagall rule (the so-called “Volcker rule”)—something I’ve suggested several times on this blog. So I can hardly be critical, can I?
However, if Joshua Brown is correct, I can, because he says the Volcker Rule in the Dodd-Frank bill is Glass-Steagall Lite:
The “teeth” of the Volcker Rule have been kicked in and there are enough holes elsewhere for White & Case to exploit on behalf of their clientele til the cows come home. The Dems unanimously voted for it. Interestingly, Republicans all voted against it. They didn’t think the final version was strict enough or that it did enough to prevent Too Big To Fail.
Hmmm—sounds like the two parties have exchanged roles this time, hasn’t it?
But I’ll leave the last word (for the moment, anyway) to the always-insightful Richard Fernandez:
Financial risk cannot be legislated away. Like energy, once in existence risk cannot be destroyed. It can only be moved around; assumed by someone. When it assumed for a fee the risk transfer is called insurance. When it is assumed by the taxpayer the result is something like Freddie Mac and Fannie Mae. Yet public or private the it remains in the system for so long as the transactions which gave rise to it are allowed. It is the distribution of risks that is affected by the bill. In that sense the spin-offs on derivatives trading mandated by Blanche Lincoln do not reduce total risk within the system. They simply prohibit banks from assuming it, assuming they do not simply reallow under other color through loopholes.
My two cents?
We should impose regulations like Canada….
Where the people still OWE banks even AFTER foreclosures…
There is no risk to a bank anymore. It is up to the people to make good decisions. The banks will not loan you money if you are a risk. You must MAKE GOOD ! 🙂
The only silver lining I see in all this Democrat steam rolling is that Obama and his party are going to drive our economy so deep into the ditch that he and his enablers will be thoroughly discredited.
Funny how statists believe in a self organizing principle in biology but not in economics.
How to solve the problem of preventing ignorant people from getting ripped off: Let them get ripped off.
I am not one who believes in completely unfettered laissez-faire capitalism, but I must say that I am extremely distrustful of the federal government’s (much less any bill designed by Chris Dodd and Barney Frank) ability to regulate financial institutions in a way that will not make matters worse. The fact that this bill ignores Fannie/Freddie does nothing to allay my fears.
I’d sign that statement.
*********
The bill creates work for lawyers and lobbyists and expands the bureaucracy, but it doesn’t seem as obviously disastrous as I’d feared. (For example, at one point Congress was talking about a four-month government review period before a proposed start-up could open for business.)
Not as obviously disastrous. I wonder what clauses are buried in there, intentionally and not.
I wouldn’t support a law meant to save puppies if it were written by democrats. Four years of them being in power informs me that it must kill fish, birds and kittens somewhere in the legislation.
People take note that the troll “gs” is here.
Note the use of a modified “Hegelian dialectical technique,” which ultimate purpose is to confuse.
A main premise is stated, then another one is introduced, but it is in opposition to the first. The mind strives to reconcile the two because that is what minds do.
gs, here, does a good job of seeming very reasonable. He does a good job of burying the antithesis. But it’s there and it doesn’t hide from the mind’s logic.
The intent is to appear as your friend, gain your trust, but then sow seeds of doubt and confusion.
I love Judd Gregg, and the country will greatly miss him.
AVI: well, a while back I tried this.
Assistant Village Idiot Says:
I love Judd Gregg, and the country will greatly miss him.
Warren Rudman also comes to mind. When I look at the “first-tier” candidates and then I see people like Rudman and Gregg being ignored, I shake my head.
I made a small donation to John Sununu’s unsuccessful 2008 reelection campaign. After he lost, he took the trouble to send a card thanking me for the contribution. No allusion to possible future campaigns, just a simple thank-you.
I’m skeptical about politicians even if I support them, but that gesture made an impression.
Let’s just cut to the chase: “It’s a great moment. I’m proud to have been here…No one will know until this is actually in place how it works. But we believe we’ve done something that has been needed for a long time.”
If they’d done something that has been needed for a long time, they would have expired.
2000 pages!! Why are these pieces of legislation so monstrously long? My guess is so only lawyers will know what’s in the bills. And why do they not do anything that needs doing? I just saw the former head of the FDIC, Bill Isaacs, interviewed by Larry Kudlow. He said the worst thing in this bill is the return to mark to market accounting. If true, the market is headed down again. He said the second worst thing was that nothing was done about Fannie and Freddie. Are we headed for a taxpayer bailout of the mortgage companies?
These humungous things keep coming out of Congress as if they were actually providing some kind of regulation of risk. Hah, the lawyers are already art work to discover the loopholes and work arounds.
The best we can hope for is some stability until some real reform can be enacted, post Obama.
Mark to market is like a vampire that just won’t die. A minor downturn in the valuation of any financial asset will create an immediate liquidity crisis, just it did in 2008. Some people never learn. This is one of those laws that will result in real consumer anger once the consumer czar decides that most forms of consumer credit are predatory. And, forget free checking.