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.
Bookmark/Search this post with