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Thursday, May 20, 2010

Senate
Passes Faux Financial "Reform" Bill

The Senate passed a financial "reform" bill today by a 59-39 vote which won't
fix any of the core problems in the financial system, and won't prevent the next
financial crisis.

The bill doesn't include the Volcker Rule (it wasn't
even debated), doesn't break up or even substantially rein in the too big to
fails, doesn't stop prop trading, and doesn't force transparency in the
derivatives market.

Senator Feingold said:

The bill does not eliminate the risk to our economy posed by "too
big to fail" financial firms, nor does it restore the proven safeguards
established after the Great Depression, which separated Main Street banks from
big Wall Street firms and are essential to preventing another economic
meltdown. The recent financial crisis triggered the nation's worst recession
since the Great Depression. The bill should have included reforms to prevent
another such crisis. Regrettably, it did not.

Senator Cantwell agreed, saying:

While this bill takes much needed steps to help prevent a crisis
of this magnitude from ever happening again, it fails to close the very same
loopholes in derivatives trading that led to the biggest economic implosion
since the Great Depression.... Throughout this debate I have fought hard
against efforts to weaken this legislation as well as to pass language to
strengthen it further. But the fact of the matter is, without key reforms in
derivatives trading, this bill does not safeguard America's economy from a
repeat of this crisis.

It sets up a process for responding the next
time we have a financial crisis, but it doesn't prevent this kind of thing
from ever happening again. We have to stop these kinds of dangerous
activities. We need stronger bans on banks gambling with depositors' money. We
need bright lines - like Glass-Steagall - that separate risky activities from
the traditional banking system. We need to refocus our financial system away
from synthetic bets and get more capital into the hands of job creators and
Main Street businesses. There are good, strong provisions in this bill, and
I'm proud of the work we did to get them in there, but I fear that without
closing the loopholes primarily responsible for this economic meltdown, we are
missing the entire heart of the matter.
Nouriel Roubini said the bill is "cosmetic", and won't stop the next
crisis.

And as I pointed
out last month:

In a letter to Senate majority leader Harry Reid and minority
leader Mitch McConnell, luminaries including former SEC Chief Accountant Lynn
Turner, former Labor Secretary Robert Reich, hedge fund owner Jim Chanos,
former Lehman Brothers Vice Chair Peter Solomon, former S&L investigator
Bill Black, former Senate Banking Committee Chief Economist Rob Johnson,
economists Dean Baker, Barry Eichengreen and others pointed
out that Dodd's proposed financial reform legislation wouldn't
have prevented the current crisis ... and won't prevent the next crisis.

Dodd himself has admitted
that his bill "will not stop the next crisis from coming".

In fact, the bill is wholly ineffective, failing to address the core things
which need to be done to stabilize the
economy. See this,
this
and this.

As I wrote
last month:

Senator Dodd is trying to push through a financial "reform" which bill
won't do anything to break up the
too big to fails, or do much of anything at all ...

For example, Dodd's bill:

Won't
break up or reduce the size of too big to fail banks

Won't
remove the massive government guarantees to the giant
banks

And won't
even increase liquidity requirements to prevent future
meltdowns

As Senator Ted Kaufman points
out:

What walls will this bill erect? None.

***

Just this week, a Moody’s
report stated: “…the proposed regulatory framework doesn't appear to be
significantly different from what exists today."

***

In sum, little in these reforms is really new and nothing in these
reforms will change the size of these
mega-banks.

Moreover - as Simon Johnson notes
- the bill intentionally doesn't have
much in the way of specifics, but just pushes off on regulators
the ability to crack down on Wall Street in the future. As Johnson notes, this
is a recipe for continued failure to rein in Wall Street:

If legislation can only empower regulators then, given regulators are only as strong a newly elected
president wants them to be, the approach in the Dodd bill simply will
not work.

Indeed, Democratic Congressman Brad Sherman - a senior member of the House
Financial Services Committee and a certified public accountant - said
recently:

The Dodd bill has unlimited executive bailout authority. That’s
something Wall Street desperately wants but doesn’t dare ask for. The bill
contains permanent, unlimited bailout authority.

And as Arthur Delaney points
out, the bill is riddled with carve-outs purchased by lobbyists:

"Obtaining a carve-out isn't rocket science," said a Republican financial
services lobbyist. "Just give Chairman Dodd [D-Conn.] and Chuck Schumer
[D-N.Y.] a shitload of money."

On MSNBC Tuesday morning, Sen. Bob Corker (R-Tenn.), a Banking Committee
member who worked closely with Dodd, said there was "no question" that
Dodd's draft contained loopholes. Corker mentioned a few hits from the
carve-out list: "Private equity firms are left out," he said. "Hedge funds
are left out."

The bill is all holes and no cheese.

2 comments:

honkyrappa said...

Did the Fed seize total control of the economy through this bill? I know
they were shooting for that, and if they accomplished it then portraying the
bill as simply superfluous could be a huge mistake. What's the word, Gdub?

May
20, 2010 10:23 PM

Josh said...

Anyone care to look at my article on
this?

http://joshfulton.blogspot.com/2010/05/dodds-financial-reform-bill-is-black.html

May
21, 2010 7:46 AM

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