What's Happening with Financial Reform Legislation?

As what happens in our Congress, things change, get confusing and obscured. Last we left off on Financial reform, we noted the Dodd bill was a Dud and things have degenerated into political circus.

Now, Senator Lincoln has introduced a new bill which will be voted on in the The Senate agriculture committee. The current guesses are it will be voted out of committee and onto the Senate floor by April 26th. Here is the actual bill text and here is her press release:

The Wall Street Transparency and Accountability Act of 2010

Senate Committee on Agriculture, Nutrition, and Forestry, Chairman Blanche Lincoln

 

This is landmark reform legislation that will bring 100 percent transparency to an unregulated $600 trillion market, close all loopholes and keep jobs on Main Street. This will protect taxpayers, jobs, consumers and the global economy, and will go further than any other proposal to prevent future bailouts.

Historic Reform of the Derivatives Market

Brings 100 Percent Transparency to Market with Real-Time Price Reporting:
Wall Street will no longer be able to make excessive profits by operating in the dark. Exposing these markets to the light of day will put this money where it belongs – on Main Street. The public will see what is being traded, who is doing the trading and, most importantly, regulators can go after fraud, manipulation and excessive speculation.

Lowers Systemic Risk by Requiring Mandatory Trading and Clearing:
Trading and clearing of swaps lower risks and make the entire financial system safer. Transactions, determined by the regulator, will be required to clear through a clearinghouse. In addition, these transactions must be traded on a regulated exchange, which will provide further market transparency.

Prevents Future Bailouts and Addresses “Too Big to Fail”:
Banks need to be kept in the business of banking. The taxpayer funds used to bail out AIG and other Wall Street firms will never be used for this purpose again. The Federal Reserve and FDIC will be prohibited from providing any federal funds to bail out Wall Street firms who engage in risky derivative deals.

Closes Loopholes:
Loopholes have allowed far too many to avoid the law of the land or set up shell companies to claim exemptions. This bill gives regulators the authority to close any loophole they find, protecting the markets, taxpayers and the economy.

Protects Jobs on Main Street:
The interests of Main Street will be protected. Commercial businesses and manufacturers who use these markets and customized contracts to manage risk will still be permitted to do so without imposing additional margin costs. This will protect American jobs and keep consumer costs low.

Protects Municipalities and Pensions:
Swaps dealers will have a “fiduciary duty,” just like investment advisers, that will require the interests of municipalities and pension retirement funds be put first; ensuring Wall Street doesn’t take advantage of Main Street and taxpayers.

Regulates Foreign Exchange Transactions:

Foreign exchange swaps will be regulated like all other Wall Street contracts. At $60 trillion, this is the second largest component of the swaps market and must be regulated.

Increases Enforcement Authority to Punish Bad Behavior:
Regulators will be given broad enforcement authority to punish bad actors that knowingly help clients defraud third parties or the public such as when Wall Street helped Greece use swaps to hide the true state of the country’s finances.

CBS Market Watch reviewed the bill:

Wall Street firms registered as banks would need to spin off derivatives trading desks to be eligible for the protections made available to banks. A Wall Street financial institution engaging in "risky derivative" deals would not be eligible for federal bailouts.

The bill also requires a large segment of the derivatives market to trade through clearinghouses, which are intermediaries between buyers and sellers that make sure both parties have enough capital. Clearinghouses require participants in a transaction to post capital and would cover losses in case a participant in a derivatives contract can't pay up.

As noted previously the House bill has exemptions on derivatives that make regulation fairly symbolic and useless.

On the other hand, businesses highly dependent on volatile commodities, such as airlines and fuel, are exempted. My question is where is it written a clearing house adds significant additional costs and what is really the issue with end users hedging on costs in exchanges? Even more interesting, there was a much tougher amendment to ban credit default swaps and force all derivatives onto exchanges by Rep. Peterson, (MN-D) back in 2009 According to Deal Book, lobbyists killed that bill. Recall Senator Lincoln is up for re-election in Arkansas. CBS Market Watch again:

Lincoln is closer to the House bank-reform bill, which also gives end-users a clearer exemption from clearinghouses. However, Dodd's bank-reform bill gives regulators more authority to require commercial end-users trade through clearinghouses.

This bill does seem to be a great improvement and incorporate the Volcker rule, in other words to separate out investment banking from commercial, at least on the derivatives front. This is section 106 of the bill, where anyone engaging in derivatives is denied even FDIC insurance or access to the discount window. I don't know if that's enough to firewall commercial from investment banking, but it's a huge improvement.

Bear in mind this will be introduced as an amendment and bear in mind that our lovely Wall Street lobbyists are just assuming they will win 100% (and given their track record, fair assumption). It could be those lobbyists rein in their puppet theater and block the entire bill over this. That said, the framework for financial reform in the Senate is still the Dodd Dud. Of course Goldman Sachs is really helping make the case we might just need to get rid of these glorified fraud shell games called structured financial products. That's my druthers, nothing gets approved until thoroughly analyzed and investigated by an independent government agency, like the FDA (although not corrupted).

President Obama has said he will veto a bill that doesn't have strong derivatives reform (whatever that is defined to be!). Oh yeah, so far the Republicans are out to vote no. What a surprise.

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Comments

white house, campaign, timing

It seems the White House is out there in de Google, using keywords to pop up a campaign to pass this bill (in what form is a very good question). So assuredly the SEC timing has a lot to do with this. Everybody hates Goldman Sachs, so one civil fraud case is great PR to pass something.

Ya know, I don't know if this is a bad thing, or a good thing, except what the details are of reform that is passed and pass something, well, it's been going on 2 years, Sept. 2008 was the bomb month, and nothing has been done yet.

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Regulates Foreign Exchange

Regulates Foreign Exchange Transactions:

Foreign exchange swaps will be regulated like all other Wall Street contracts. At $60 trillion, this is the second largest component of the swaps market and must be regulated.

It is a bit depressing that this bill is being written in a way that will make corporate balance sheets more volatile. Putting FX swaps on an exchange and through clearing firms will drive up the cost for firms to hedge b/c of margin requirements. The margin requirements will tie up corporate capital that could be otherwise deployed for more productive uses. Currently firms can rely on bank credit lines, which are efficient and WHICH ARE EASY TO REGULATE AT MUCH LESS COST TO THE CORPORATION AND TO THE BANKS.

The outcome of this type of regulation:
- fewer companies will be willing to hedge legitimate FX risk
- more volatility in corporate balance sheets and earnings
- less efficient use of corporate capital LEADING TO FEWER JOBS FOR MAIN STREET (can someone please explain to me the difference between Main Street and Wall Street)
- a huge loss in revenues for banks providing these valuable, flexible and highly efficient contracts - by the way that means a huge loss in jobs for US banks - companies will still hedge with foreign banks
- a big boom in business for clearing firms i.e. Wall Street (I thought they were the bad guys)

The over the counter fx swap market is highly efficient and flexible, a rarity in any market. It works. It doesn't cause volatility, it actually dampens it.

We are cutting off our noses to spite our face by moving these contracts to exchanges.

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foreign currency exchanges

This is the area where I think a hell of a lot more details and debate needs to happen. Frankly, I see the glaring loopholes upon which the game is rigged, without transparency. On the other hand, generating more fees doesn't sound too swell. But why exactly is it claimed these "flexible and highly efficient" contracts must not be on public exchanges? What is it that is the problem? Why, would one not want capital requirements if a hedge goes bad? In terms of jobs, are you kidding me? Do we see any jobs as a result of the TARP bail outs? I sure saw a lot of contracts for offshore outsourcing going on, a $2 billion dollar one by Citigroup alone. So, someone prove to me, this capital is magically going to create jobs in a currency swap capital requirements hedge. Jobs with global labor arbitrage? Sure, I can believe that one, but U.S. jobs for the U.S. workforce? Prove it.

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Another Obama Sell-Out

This financial "reform" bill is a sell-out to Wall Street by Obama and Co.

Huffington Post has two articles that show that Wall Street has its fingerprints all over this bill. CS Monitor has one past article that shows the same. Even with the provision where $50 billion will be put up by the banks themselves, this bill is a sell-out to Wall Street and increases the power of the Federal Reserve.

http://www.huffingtonpost.com/2010/04/18/thomas-hoenig-top-fed-off_n_541...

http://www.huffingtonpost.com/2010/03/14/dodd-financial-reform-bil_n_498...

http://www.csmonitor.com/layout/set/print/content/view/print/270181

It was bad enough that Obama sold-out to Big Insurance & Big Pharma (as Jane Hamshers article below shows), but now this?

http://www.huffingtonpost.com/jane-hamsher/fact-sheet-the-truth-abou_b_5...

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Resolution Trust Authority

Right. This post mainly goes into derivatives reform, which up to this point has exemptions which in a nutshell, exempt everyone, so the same things can go on. The Lincoln Bill is might tighter, which is a positive, but not as strong as it should be.

But, that doesn't diminish our previous criticisms and pointing out the flaws. As far as I know the same concepts, i.e. the "permanent bail out fund" (resolution trust authority) and the sticking the CFPA under the Fed., the exemptions everywhere are still valid as we pointed out n the linked up posts on the overall bill. (if something has changed, please tell us in a comment, following legislation is like capturing a greased pig!)

Hell, during the primaries I was screaming bloody murder that Obama was bought and paid for by hedge funds and Congress is even worse, that's why it would be very surprising to see anything at all, even the most symbolic, get through Congress that actually wasn't written by these banking lobbyists.

On the entire Resolution Trust authority, which I think it's what you're referring to, supposedly Sherrod Brown has an amendment up to bottom line, break up the big banks with a financial cap (I thought last time I checked, relationship to overall US GDP).

I don't know where some sort of reinstatement of Glass-Steagall or it's weaker counterpart "Volcker Rule" is yet in the bill.

I don't think you'll see to much argument on this site on both health care reform and financial reform....

but bear in mind there are a few Senators and a few Congress reps. really trying to do something. Lincoln, case in point is up for re-election and obviously the entire state of Arkansas is hopping mad. So, it is those representatives who could bow to public outcry the most, because they are going to lose their seats...

except for Harry Reid of course, who acts like he has the Nevada vote already rigged, he ignores his constituents or the American public to such a degree.

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Lincoln's Bill Passed out of Senate Ag. Committee

So, the tightening up (but not enough) derivatives moves to the Senate Floor. That's an improvement, at least.

Grassley's Voting w/Dems Significant

This bill appears to have more support on both sides than I would have imagined.

Imagine a populist outrage being supported on both sides?

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Grassley has done this quite a bit

He's extremely pro tech labor and has worked with Bernie Sanders as well as Durbin, Dorgan. This is why I don't care for that across the board partisanship. There are a few who do cross over sometimes and I"m seeing claims (Ed show is beyond belief partisan hack! Sorry!) that the $50 billion isn't a problem and as you know, all over the financial sites, wanting real reform, we'll all saying stop too big to fail by breaking them up, this $50 billion stinks like permanent bail out and a set up to have it all happen again.

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Dodd's carve-outs

This is a good article for describing all the exemptions in this bill.

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