StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Barney Frank and Chris Dodd put the ball over the line

25 Jun 2010
Posted by Edmund L. Andrews


It took until 5:08 AM this morning, but House and Senate conferees reached final agreement on the Dodd-Frank bill to reform financial regulation.

Despite countless compromises, the final bill will be a big improvement over what we have now if, as seems certain, it wins final passage in the House and Senate.

it's impossible to dissect all the last-minute deals right now in the big fights.  But my quick take is that the reformers held up amazingly well in the face of massive lobbying from banks, non-banks, Wall Street, hedge funds and the rest of the financial services industry.

The bill would give the government new power to oversee systemic risk and to shut down giant failing institutions (another AIG) in an orderly way. It includes a surprisingly strong “Volcker Rule,’’ which almost prohibits banks, with their federally-insured deposits and special access to Fed borrowing,  from engaging in proprietary trading. It sharply restricts the ability of banks to trade derivatives.  It cleans up the whole business of derivatives by moving the trading into clearinghouses and onto exchanges where it will be transparent and properly capitalized.

And it creates a new consumer protection agency, albeit within the Federal Reserve, with the power to crack down on shady mortgages, credit card practices, payday lenders and other financial services. 
I’ve already complained about the capitulation to car dealers, who will be exempted from the new consumer protection agency. But I’m more impressed by how much lawmakers stood their ground against relentless industry.   It imposes structural limits on what banks and investment banks can do, something we haven't seen in many decades now.   
I have become convinced that structural changes -- telling banks they have to stay out of certain lines of business, and subjecting all the players to new regulation -- are the only way to protect against the excesses that gave us this financial crisis. Trying to prevent disaster by having regulators micro-manage a bank's risk exposure is necessary but insufficient.  Over time, the banks are just too good at lulling the regulators to sleep.

All this will cut into bank profits, and could clobber the earnings of Goldman Sachs (though I’ll believe that when I see it). And yes, it is likely to reduce the supply of EZ Credit by forcing banks to hold both more capital and better-quality capital.

But those are not necessarily bad consequences for the overall economy. If easy access to credit were the solution to our problems, we never would have had a crisis in the first place.  And remember, there is a big difference between reducing the bank profits and reducing overall economic activity.  If the banks can't trade derivatives as much as before, new players will fill the vacuum if there really is one.
Republicans and industry lobbyists have been warning about "unintended consequences'' of almost every single substantive reform. But if the bill turns out to be heavy-handed, Congress will undoubtedly respond to the howlings from industry and make changes. 
In the meantime, though, Republicans will deserve a good measure of the blame.   For the most part, they refused to engage in the process and simply worked to block any legislation from passing.   Had the GOP been willing to engage, Republicans would have been able to soften many provisions and we might have had a more thoughtful bill. Instead, they abdicated responsibility and contented themselves with making cat-calls from the sidelines. It’s a valid political strategy, but it’s a lame approach to governance.

the bill doesn't include Fannie and Freddie

Without including Fannie and Freddie and their excesses, this bill misses the mark by a wide margin.

I know the Krugman et al line is that Fannie and Freddie had nothing to do with the financial crisis, but that is hack partisanship. The two GSE's own or guarantee more than $5.3 trillion in U.S. mortgages, and roughly 20% of those are underwater. At least $1 trillion in taxpayer dollars are at risk.

To date the two GSE's have already chewed through $145 billion in taxpayer money, with no end in sight. The CBO estimates that the total tab to the taxpayers will likely be around $390 billion, but even that is an optimistic guess. Treasury lifted the limit on GSE support on Christmas Eve (it was capped at $400 billion), and the exposure now is essentially unlimited. This money will never be paid back.

So, Dodd and Frank, who presided over this debacle, earn kudos from Edmund Andrews. Keep whitewashing it away, while stealing the money from the responsible taxpayers who didn't treat their houses like an ATM.

Fannie/Fredie not included, but

While Fannie and Fredie are not included--and eventually need to be, because the size of these two GSEs, plus FHA, or so substantial--it's probably not the guilty party for the 2008 credit crisis. After all, both existed since the New Deal without tipping the country into a depression. Indeed, most of the rest of the world does not have 30 year fixed mortgages, and it's the existence of the GSEs which permitted this. It seems most likely that it was the emergence of shadow banking which was unregulated and quant models inappropriately applied that created portfolios with large NINJA, Alt-A and sub-prime positions. Note that none of the GSEs invested in any but 30-year fixed, conforming mortgages.

This bill regulates an unregulated portion of the market. There's a good case to be made for regulating the GSE more tightly as well, but I suspect this is not the position of YABW

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