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David Weidner's Writing on the Wall
June 29, 2010, 12:01 a.m. EDT · Recommend (2) · Post:
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By David Weidner, MarketWatch
NEW YORK (MarketWatch) -- Washington has shuffled the deck Wall Street plays with, hoping to create a new and safer game, but anyone who's gone back to the table after a big loss knows the score.
Same cards, same risks, and if you stick around long enough, the house always wins.
Reuters Chairman of the U.S. Senate Banking Committee Christopher Dodd (R)(D-CT) and Rep. Barney Frank (D-MA)
There are a lot of good intentions built into the Dodd-Frank bill. Lawmakers have tried to create standards for mortgage underwriting, preserve and strengthen bank capital and move risky derivative exposure off the balance sheet and into the open.
The banks with the most to lose include Bank of America Corp. /quotes/comstock/13*!bac/quotes/nls/bac (BAC 14.57, -0.67, -4.40%) , Citigroup Inc. /quotes/comstock/13*!c/quotes/nls/c (C 3.73, -0.27, -6.75%) , J.P. Morgan Chase & Co. /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 37.06, -1.48, -3.84%) , Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs (GS 133.76, -2.90, -2.12%) and Morgan Stanley /quotes/comstock/13*!ms/quotes/nls/ms (MS 23.45, -1.07, -4.36%) .
If you had to boil down the complex bill's main flaw it's that it puts too much emphasis on regulators who have failed in their charged tasks. The Securities and Exchange Commission and Federal Reserve -- at least based on their track record -- are short on the kind of man and brain power required to successfully oversee Wall Street risks.
Without trained and well-paid regulators and without closing the revolving door, it's hard to feel hopeful about financial reform, as well-intentioned as it may be. And even with the best intentions, the bill leaves plenty of loopholes to exploit. Here are 10 obvious ones.
The Volcker Rule. Intended to reduce bank risk, the rule curtails bank participation in proprietary trading, private equity and hedge fund investments -- businesses that arguably were tangential to the financial crisis. Don't believe it? Name one depository institution that teetered due to investments in these businesses.
Derivatives and swaps. Banks will be forced to spin off some derivatives and add more capital to those they keep. Exchanges would provide transparency. This will probably dampen bank profits. But really, looking back, it's unclear how this rule would have prevented the earlier crisis. The biggest credit-default swap provider that ran into trouble was American International Group Inc. /quotes/comstock/13*!aig/quotes/nls/aig (AIG 34.52, -1.86, -5.11%) An insurer, not a bank.
Financial Stability Council, Resolution Authority. What do you do when you don't know what to do or are too scared to do anything? Create a committee. That's really what's happened here. Does anyone really think regulators who fed or at least missed the housing bubble will find the next one? Even if they do get it right, any decision will require a two-thirds majority. And even that can be challenged in court. Moreover, without clear restrictions on bank size -- four banks control 56% of assets in relation to gross domestic product -- what are regulators supposed to look for? Matches and gasoline? Read related column on the 'financial industrial complex.'
The Federal Reserve. It's getting a one-time audit, but what happens after that? Can any good news come out of a review? Also, the body responsible for low interest rates, a laissez faire approach to derivatives (it shouted down regulation in the late 1990s) retains its authority of smaller banks and becomes a last line of defense since the bill eliminates the Office of Thrift Supervision.
State pre-emption. A big defeat for banks which don't want to tangle with 50 new sets of rules. The benefits of this will be short-lived in states that want to entice the banking industries to their state through "finance friendly" regulation. Consumers in those states will lose.
Consumer protection agency. A needed body, but unfortunately it will be run by the Fed which now will have to tackle payday lenders, check cashers and other non-bank finance companies. For the Fed's prowess in regulation, see No. 4. Also, lobbyists scored a victory in that auto dealers are exempted. "No money down. No credit check," still lives for what's usually the second-biggest financial decision for a household.
Mortgages and adviser standards. Much needed, though with credit tight, most banks have already put the squeeze on new borrowers. The act will wipe away incentives to brokers who steer clients to expensive loans. That probably means all loans will become expensive. For financial advisers, the move to a "fiduciary" standard from a "suitability" standard will increase costs without obvious benefits.
Fannie Mae /quotes/comstock/13*!fnm/quotes/nls/fnm (FNM 0.35, -0.02, -5.48%) and Freddie Mac /quotes/comstock/13*!fre/quotes/nls/fre (FRE 0.42, -0.02, -4.21%) . Not included in the bill. A travesty.
Credit-rating firms. To be regulated by the SEC or a "quasi-governmental" agency. Though it puts more liability on companies such as Standard & Poor's, a unit of McGraw Hill Cos. /quotes/comstock/13*!mhp/quotes/nls/mhp (MHP 29.39, -0.46, -1.54%) , and Moody's Investors Service /quotes/comstock/13*!mco/quotes/nls/mco (MCO 20.01, -1.24, -5.84%) , does the name Bernie Madoff mean anything to those who think the SEC is up to the task?
Glass-Steagall. The Depression-era separation of banking from investment banking is not included in the bill. For more than 50 years it basically kept the casino out of the bank branch. The industry says finance is too complex to bring it back. Proponents say that's precisely the reason it should have been brought back.
There's more, too. Where are protections against off-balance-sheet entities? Other than a benign say-on-pay provision, where's any kind of executive pay provision? Does a bank owning 5% of a mortgage-backed security make anyone feel safer?
Don't get me wrong. The Dodd-Frank bill has some good things in it. Compared to business as usual, it's not going to be the wide-open environment the financial industry has operated in for a decade.
But really, the bill could have been so much more. Even if regulators make all the right moves, there's still a lot of potential for trouble. Switching the game from Texas hold 'em to gin rummy must have sounded safe in committee. Too bad the game is going on in the back of the bank.
David Weidner covers Wall Street for MarketWatch.
David Weidner is the Wall Street columnist for MarketWatch. He formerly covered M&A and financial services at The Daily Deal, American Banker and Dow Jones. He writes the Writing on the Wall column which appears Tuesday on MarketWatch and Thursdays on WSJ.com. He also is a regular contributor to the News Hub.
The high-end purveyor of fine electric cars went public and it rocked. It's hardly surprising: As far as IPOs go, this one tugged at lots of heartstrings.
3:13 p.m. Today3:13 p.m. June 29, 2010 | Comments: 11
- whoami911 | 11:36 p.m. June 28, 2010
"thank you RT @AlephBlog: rephrase: gives failed regulators 2 much power RT @davidweidner: http://bit.ly/9ceLAJ" 1:34 p.m. EDT, June 29, 2010 from davidweidner
"The bill's "main flaw it's that it puts too much emphasis on regulators who have failed" http://bit.ly/9ceLAJ" 7:24 a.m. EDT, June 29, 2010 from davidweidner
"David Weidner's Writing on the Wall: 10 ways financial reform misses the mark: Washington has shuffled the deck Wa... http://bit.ly/bgGa8d" 11:05 p.m. EDT, June 28, 2010 from davidweidner
"Barry RItholtz with a nice report card on financial reform bill. http://bit.ly/9DLgDT" 12:22 p.m. EDT, June 25, 2010 from davidweidner
"When I talk about bob, I don't mean Tony Hayward's yacht." 7:04 a.m. EDT, June 24, 2010 from davidweidner
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