Will the Financial Overhaul Really Work?

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Todd Harrison

July 21, 2010, 12:01 a.m. EDT · Recommend (3) · Post:

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China postures for the New World Order

Apache's BP shopping spree

By Todd Harrison

NEW YORK (MarketWatch) -- The U.S. Senate passed the biggest overhaul of the banking industry since the Great Depression and it has the potential to be a toothless tiger.

We've long offered that the fatal flaw of financial regulation is that it's a political process while markets move in real time. Factor in the interconnectedness of our finance-based global economy and weave in one quadrillion dollars in outstanding derivatives and you'll get a sense of the enormity of the task at hand.

The fact that we've taken steps -- not proactive steps, but steps -- toward a solution set is a positive progression. Given how tenuous the political climate is, it's a small miracle it passed at all. The 2,300-page bill gives regulators ammunition to take aim at systemic risks and supervise previously unregulated trading, which moves the needle in the right direction.

The issue at hand is that politicians still don't seem to grasp the magnitude of the current condition. This legislation is akin to adding a few cops to a big city with hopes that a riot doesn't break out.

This beast has been building behind the scenes for over a decade and nobody cared as long as the screens were green. We're talking about risk gone awry and greed gone wild, the unfortunate manifestation of a few fatally flawed decisions by folks in a position of power. Read Minyanville's "Anatomy of a Recession."

How deep-rooted is it? Let's revisit a discussion we had five years ago at the Minyans in the Mountains retreat in Ojai as a jumping off point. Read Minyanville's Ojai Keynote.

"The problem that comes from engaging in high-risk behavior for which the consequences are absent, even if only temporarily, is that such high risk behavior begins to appear normal, and the entire scale of risk gets adjusted and pushed out. When we look at sentiment proxies such as the volatility indices and investor's intelligence reports, investors seem to be saying that it doesn't -- and won't -- matter.

Adding spice to that mix, a complex maze of derivatives has tied together the balance sheets of the world's largest organizations. With the emergence of bearded financials such as General Motors, General Electric /quotes/comstock/13*!ge/quotes/nls/ge (GE 14.94, +0.32, +2.19%) , and Ford /quotes/comstock/13*!f/quotes/nls/f (F 11.75, +0.27, +2.35%) -- all of which have considerable finance arms -- it's quite possible that a ripple in Fannie Mae /quotes/comstock/11k!fnma (FNMA 0.29, 0.00, 0.00%) or JP Morgan /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 39.63, +0.59, +1.51%) will have an exponential impact across a wide array of sectors and industries."

That was five years ago and despite the fright during the first phase of the financial crisis, the imbalances are cumulative still. The notion that General Motors or General Electric could be infected by a financial virus seemed nonsensical at the time and it wasn't until the wheels fell off the wagon that people paid attention. As reactive regulators learned the hard way, skating on your heels is a hard way to score -- or achieve -- a goal.

"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world."

Thomas Jefferson

This is no game, however; we're no longer talking about the automotive industry or stateside conglomerates. The cancer has spread globally, setting the stage for a more daunting sovereign sequel. Welcome to the Age of Government.com, where the elasticity of debt and the perceptions thereof will shape our lives for the foreseeable future. Read Minyanville's "A Five-Step Guide to Contagion."

There's no way to know when this comeuppance will come to bear or if perhaps it might be avoided altogether. We can only hope. To say there are motivated global agendas to prolong the consequences of this unenviable outcome could be the understatement of the century. Read Minyanville's "The War on Capitalism."

Take a moment to think about that. Think about what pushing risk out on the time continuum will do to the quality of life for our children. As my niece Maia would say, "Uncle Toddy, that's NG."

It's difficult to gauge a semblance of timing when the rules of engagement are constantly in flux. When the other side of the perfect storm arrives however, the inability of this proposed legislation to stem the next iteration of contagion will likely feed a crisis of confidence. Read Minyanville's "The Eye of the Financial Storm."

That shifting social mood has been brewing for some time as well and yes, it too is cumulative.

Todd Harrison is the founder of Minyanville.com .

Apache's deal with BP makes it look like it picked very deliberately through BP's holdings, fully aware it was dealing with a wounded giant in need of cash.

7:38 p.m. July 20, 2010 | Comments: 5

*"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world." - Thomas Jefferson It's a quote from someone who was wiser, more considerate, and thoughtful than most of today's leaders. Many of them remind me of screaming monkeys throwing feces at each other. And Jefferson lived over 200 years ago..."

- Castor-PolluxM35 | 11:39 p.m. July 20, 2010

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