Swept away

Sweeping overhaul, or sweeping under the rug?

USA Today reports, Overhauling financial regulation

Two years after the nation faced its worst financial crisis since the 1930s, both houses of Congress have passed sweeping proposals to subject the financial services industry to stricter oversight and tougher rules.

The WSJ Heard on the Street, reports, Reading the Tea Leaves on Financial Overhaul

Break out the stogies. Congressional leaders are moving debate over financial reform into the proverbial smoke-filled back room.

It is widely expected that a provision forcing banks to spin off derivatives-trading businesses will be watered down or pulled completely.

Meanwhile, big question marks still hang over a ban on proprietary trading by banks, the so-called Volcker rule. As included in the Senate bill, the provision doesn't clearly define proprietary trading versus, say, market making. Nor does it make clear if trading in instruments like government securities or mortgage-backed bonds backed by the government would be exempt. Just how painful such a provision could be depends on where the conference committee draws the lines.

The insurers have argued that Congress didn't intend to rope them into the Volcker rule, but so far efforts to exclude them haven't flown. That said, insurers have a degree of Senate support for a carve-out.

Bonfire of the Loopholes

The bottom line is that despite the blizzard of amendments and provisions added—including some very smart changes at the 11th hour, like imposing greater control of ratings agencies—what's likely to emerge on the other side of this in the years to come is a Wall Street that's largely unchanged if marginally more regulated.

Indeed, if any structural changes to Wall Street follow from this law, it is likely to be that the biggest banks get even more powerful than they already are, despite the size limits being placed on them.

A new tough generation of regulators led by Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), says they're not worried by these nuances because the bill gives them broad discretion to write rules requiring open trading and clearing of swaps and other derivatives. And that's what they intend to do. The problem is: Gensler's not going to be around forever, and the Bush-era regulators got into the habit of not using any of their discretion at all. After all, banks urged them over the years not to worry. The same cycle is likely to repeat itself when the next boom arrives.

And finally, Zero Hedge, as it is wont to be, is strident:

The reform bill is a joke. It reforms nothing, it fixes nothing, and it will not prevent the next much bigger crash from happening.

Just two items that need to be pointed out: $6+ TRillion in GSE debt - untouched, $400 TRillion in IR swaps: untouched. This is reform?

For those wanting a program guide, try this one, courtesy of the NYT.