Misnamed Financial Services “Reform” Bill Passes, Systemic Risk is Alive and Well

I want the word “reform” back. Between health care “reform” and financial services “reform,” Obama, his operatives, and media cheerleaders are trying to depict both initiatives as being far more salutary and far-reaching than they are. This abuse of language is yet another case of the Obama Adminsitration using branding to cover up substantive shortcomings. In the short run it might fool quite a few people, just as BP’s efforts to position itself as an environmentally responsible company did.

Witness some of the headlines today that no doubt give Team Obama cheer: “Big banks face ‘jarring shake-up’ from new regulations” (MarketWatch); “U.S. Lawmakers Set Historic Finance Deal” (Wall Street Journal); “In Week of Tests, Obama Reasserts His Authority” and “In Deal, New Authority Over Wall Street” (New York Times).

But the market action said it all. On a flat trading day, financial firms shares rose 2.7% after the deal was announced. And the Financial Times (the only financial news purveyor whose reporters and columnists were savvy enough to recognize the credit bubble and indicate it was likely to end badly) gave a wonderfully understated diss:

If approved as expected, the legislation would mark the most dramatic change in financial rules since the 1999 repeal of the Depression-era separation of investment and commercial banking. It would pave the way for President Barack Obama to claim, after the recent healthcare reform, his second key legislative victory.

Yves here. This is simply arch. To appreciate the significance of the comparison to the 1999 Glass Steagall repeal, you first need to compare it to the PR in the US press, which touts the bill as the most sweeping reform since the Great Depression. The FT isn’t buying the hype. Moreover, the Glass Stegall repeal was even less significant than the headlines then or more recent commentary would suggest. Why? By 1999, Glass Steagall was so shot full of holes with all regulatory waivers that it was close to a dead letter. Banks had been obtaining variances since the 1980s. By the mid 1990s, securities firms were making bridge loans and the biggest banks were increasingly influential in derivatives, stock, and bond underwriting.

So why was Glass Steagall dismantled? Banks were still restricted to making no more than 25% of revenues in their securities operations. The main reason for the repeal appears to have been to allow the merger of Citigroup and Travelers (which owned securities firm Salomon Smith Barney) to proceed.

And note the wording of the second sentence: by commenting Obama’s “legislative victory,” the pink paper dares suggest that the most important outcome of the bill’s passage is in giving Obama another notch on his belt.

So what does the bill accomplish? It inconveniences banks around the margin while failing to reduce the odds of a recurrence of a major financial crisis.

The only two measures I see as genuine accomplishments, the Audit the Fed provisions, and the creation of a consumer financial product bureau, do not address systemic risks. And the consumer protection authority was substantially watered down. Recall a crucial provision, that banks be required to offer plain vanilla variants of products, was axed early on. In addition, the agency, initially envisioned as independent, will now be housed in the Fed, which has never taken any interest in consumers (witness its failure to enforce the Home Owners Equity Protection Act, a rule which would have limited subprime lending) and has a long standing hands-off posture towards its charges.

Most of the rest is mere window dressing. The Volcker Rule was substantially watered down. Banks can still own private equity and hedge funds so long as they do not exceed 3% of core capital. There is no justification, nada, for organizations enjoying state guarantees to engage in anything other than socially useful activities that cannot be readily provided by outside players. Nevertheless, Goldman may have to reduce its PE and hedge fund exposure by as much as $10 billion, and Morgan Stanley, $3 billion. While there are purported to be limits on proprietary trading, the latest state of play was to designate transactions with customers as not being prop trades, an absurd definition given the intent of the provision (I must confess I have not seen the final language, so any reader input here would be appreciated).

From a systemic risk standpoint, the two most important things that needed to happen were greatly increased equity levels (this would need to take place gradually) and a reduction in the “tight coupling” of the major capital markets firms. Right now, the top dealer firms are part of a badly designed network, where if one node goes down, it can bring down the entire grid. Neither was tackled in a serious way.

The most important two products to address in term of the excessive interconnectedness of financial firms were repos and credit default swaps. The New York Fed has been soldiering along on repo, yet is unconvinced of the effectiveness of its changes (!); the Blanche Lincoln amendment got reworked into putting the riskiest derivatives, including CDS, into a separately capitalized operation. Since (as we have discussed at length) CDS are not economic if adequately margined/capitalized, this measure does almost nothing to defuse the CDS bomb (the same problem exists even if the CDS are cleared centrally, which means the clearing organization becomes a potential AIG, a mere concentrated point of failure. and Alea points out a paper that argues that Are We Building the Foundations for the Next Crisis Already? The Case of Central Clearing” the central clearing organization could actually INCREASE counterparty risk).

We will address the resolution authority headfake separately, later this weekend. Suffice it to say that all the major firms have significant international operations, so you can’t design a new improved resolution regime from the US alone. Bankruptcy is an adjudicated process, subject to the national laws of host countries. I am told by someone in a position to know that none of the 30 to 40 lawyers in the world competent to advise on this matter were consulted on the legislation.

A sampling of comments on the bill. From Michael Hirsh of Newsweek, “Financial Reform Makes Biggest Banks Stronger“:

Dodd-Frank effectively anoints the existing banking elite. The bill makes it likely that they will be the future giants of banking as well. Legislators touted changes that would restrict proprietary trading by banks and force them to spin off their swaps desks into separately capitalized operations. But banks get to keep the biggest part of their derivatives business, which is dominated by interest-rate and foreign-exchange swaps. Some 80 to 90 percent of that business will remain within the banks, and J.P. Morgan, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley control more than 95 percent, or about $200 trillion worth of that market. These same banks may end up controlling or at least dominating the clearinghouses they are being pressed to trade on as well, since language proposed by Rep. Stephen Lynch, D-Mass., to limit their ownership stakes to 20 percent, was dropped in the final version of the bill, according to Lynch’s spokeswoman, Meaghan Maher. “No numerical limitations were set; regulators were given the ability to do so,” she said.

The bill leaves many other future decisions, for example on pay structure and incentives, to regulators as well. “The bottom line: this doesn’t fundamentally change the way the banking industry works,” says a former U.S. Treasury official who has followed the legislation closely but would give his judgment only on condition of anonymity. “The ironic thing is that the biggest banks that took the most money end up with the most beneficial position, and the regulators that failed to stop them in first place get even more power and discretion.”

From Marshall Auerback:

The whole approach to financial reform has failed to deal with the core problems with gave rise to the crisis in the first place. Credit default swaps, collaterised debt obligations, etc., need to be understood as key components of an integrated system, the so-called “shadow banking system”, which was at the epicenter of the crisis…..

As Jan Kregel has noted…“the liquidity crises in 1998 and 2008 produced, not a run on banks, but a collapse of security values and insolvency in the securitized structures, and the withdrawal of short-term funding from the shadow banks. The safety net created to respond to a run on bank deposits was totally inadequate to respond to a capital market liquidity crisis.”

The new “financial reform” bill merely reflects the model of a banking structure which was already largely gone by the time we abolished Glass-Steagall. The proposed bill fails to recognise that in a capital market-based credit system, the key player is not the bank that originates and holds the loan, but rather the dealer who makes liquid markets in the security into which the loan is bundled. In such a system, the focus of regulation should not be on the capitalization and liquidity of banks per se, but rather on the capitalization and liquidity of dealers….

Ideally, systemically risk products such as credit default swaps should be abolished, as they serve no public purpose. But this is impossible in the real world. Pandora’s Box has been opened and can’t be shut again.

The problem with today’s reform is that sellers of credit default swaps without an adequate capital cushion may be required to post collateral on an exchange, which raises the question, “How much collateral is enough?” AIG clearly didn’t have enough. Potentially, no private financial institution does…

We should also impose greater regulatory oversight on the products emerging from this capital based market system. There is no reason why the SEC could not rescind rule 3a-7, which has exempted securitised structures from registration and regulation under the Investment Companies Act. This rescission would functionally act like a Tobin tax insofar as the resulting higher regulatory thresholds would likely slow down the proliferation of new securitised products, as well as imposing a great fiduciary responsibility on the issuer.

From Bill Black:

The fundamental problem with the financial reform bill is that it would not have prevented the current crisis and it will not prevent future crises because it does not address the reason the world is suffering recurrent, intensifying crises. A witches’ brew of deregulation, desupervision, regulatory black holes and perverse executive and professional compensation has created an intensely criminogenic environment that produces epidemics of accounting control fraud that hyper-inflate financial bubbles and cause economic crises. The bill continues unlawful, unprincipled, and dangerous policy of allowing systemically dangerous institutions (SDIs) to play by special rules even when they are insolvent. Indeed, the bill makes a variety of accounting control fraud lawful. The financial industry, with Bernanke’s support, already got Congress to extort FASB to gimmick the accounting rules so that insolvent banks could hide their losses and continue to pay the executives (already made rich by destroying “their” firms — that’s the meaning of Akerlof & Romer’s classic article: “Looting: Bankruptcy for Profit”) massive bonuses. All of this is made possible by huge, off budget subsidies to the SDIs via the Fed and Fannie and Freddie.

Even the New York Times conceded, “Industry analysts predicted that banks would most likely adapt easily to the new regulatory framework and thrive. ” That proves the bill falls laughably short of its PR; it would take either a radical restructuring of the industry, or regulating banks like utilities, to reduce the risk of another major crisis.

But despite the hype, the public may not be so dumb after all. Bloomberg tells us: “Obama’s Legislative Accomplishments Fail to Bolster Popularity.” It appears at least some voters can discern the difference between mere optics and substance.

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  1. attempter

    Well, the only thing we can hope and act for is that each such monumental act of dysfunction and crime wakes up more people to the fact that this is an irremediable kleptocracy.

    The government and both criminal parties are proven to be corrupt beyond redemption. There will never come another significant constructive act out of this system. Legislation or executive action, anything and everything it does will be a sham at best, and more likely a further assault. The finance bill is a combination of these, while the health racket bailout, which we should be greeting as our Stamp Act, is a stark exercise in the latter.

    This also means all the old policy ideas which sounded good in principle, in the ivory tower, have to be thrown out as well. Something like a VAT, enacted by this system, will be nothing but a regressive vehicle of wealth redistribution upward. That’s now the purpose it serves in Europe. (It’s one of the favored “austerity” weapons.) So no matter how “progressive” something may have once seemed in principle, if it would require enactment by this system, then forget it. It’ll be hijacked.

    In the end it’s really like with any other kind of dope fiend. Those who still believe in this federal government, either party, hijacked elections, the federal courts, or the media, the “process” in general, will have to hit bottom before they realize how pernicious and destructive is their addiction. Unless it kills them first, which may very well be what happens here. So far that’s where we’re headed.

  2. RueTheDay

    The Volcker Rule was simply an attempt at achieving the same result as reinstating Glass-Steagall without having to actually break up the mega banks.

    It may have been somewhat successful, had it not be completely watered down in the latest round.

    We really need to bring back an updated Glass-Steagall, updated to extend the unbrella of commercial bank regulation to the shadow banking system. I discuss the shadow banking system here:


  3. koshembos

    As with the health care “reform,” the financial reform leaves the big trouble causing institutions, i.e. banks, intact.

    While health care will continue to be as or more expensive as it is today, the big banks will continue to constitute a huge section of the country’s economic activity. As a result, industry will not have either the incentive or the fuel to recover or expand leading us to increased poverty, form a larger gap between us and countries such as Germany and further make the US a smoke and mirror economy.

  4. JC

    As I commented in an earlier article here:


    it’s too bad that following this bill closely turned out to be such a waste of time. It has been obvious from the beginning, based on previous “reforms” that nothing would be done to really change the status quo.

    The only thing that has changed from my perspective is that after 13 months of unemployment I’ve finally found a job, although I have to move 2600 miles in order to start work. Just in time to put every dime into gold and silver and then wait for the next inevitable collapse.

  5. alex

    The political approach to this non-reform was very clever. Rather than remove provisions they simply watered them down to the point of meaninglessness. That was portrayed as “negotiation” and “compromise”. Any complaints will be met with “but we have provisions” and “nobody will agree on all the details”. Most people’s eyes will glaze over (mine do).

    The only honest thing for a congresscritter to have done would have been to vote nay on this bill. Better we have nothing than a sham.

  6. Jackrabbit

    Congress claims to pass regulatory reform while regulators continue to allow banks to mark to fantasy. It would be funny, if it were so pathetic and scary.

    Is there ANY roadmap leading back to mark to market? None that I can see.

  7. Tom Crowl

    Ms. Smith you are SO right about the misuse of the word ‘reform’.

    In the Middle Ages astrologers were boggled by the unwillingness of the heavens to conform to their earth-centric models… so they kept adding little epi-circles to their charts and rationalizations for the stubborn ‘wanderings’ of those fickle planets across the obviously (they thought) ‘fixed’ sky.

    So they kept on ‘reforming’ astrology.

    It was only when they had to face the reality that they really WEREN’T the center of the universe that truth crept in. (That realization hasn’t quite hit banking, government and blind Corporatists… but we’re paying for it bigtime!)

    Astrology faded (though tellingly it’s still around!) and the science of astronomy was born.

    I’m afraid economics (and the left/right political spectrum) is facing a similar dilemma.

    I’ll leave that part of this discussion for another time but wanted to touch on something sort of ‘here-and-now’.

    My patent attorney and I had a very fruitful discussion with the patent examiner and his supervisor yesterday. I cannot give details here but suffice to say they ‘got’ the mechanism and understood the need. There may be some reason for optimism.

    There are many here with interest in new ideas for improving our social and cultural ‘mechanisms and systems’ so if there should be any curiosity concerning details, and with suitable non-disclosure stuff all handled (my attorney says I need to do that) I believe its time for me to seek some additional advice and associates. Really at this point I just need a couple of thousand dollars for the patent extension and minimal attorney fees (he’s been working almost for free so far).

    It’s a simple idea. But so was the lightbulb… just heat up a wire until it glows.

    So far neither government, the two-parties nor large corporations are interested in:

    A Commons-owned neutral platform for both political and charitable monetary contribution… which for very fundamental scaling reasons must allow a viable micro-transaction (think x-box points for action in the Commons). The resultant network catalyzes additional functionality for co-ordination of other ‘social energy’ utilization. (P.S. Its the most neutral and ultimately politically viable method for the public finance of elections.)

    P.S. I’ve been perhaps too careful about NOT presenting this to any VC or Angel network because I don’t want this mechanism “Jerry Springerized” which is something that gives me some concern. Your blog is the first place where I’ve made such a specific request though I want to hit Kevin Kelly’s site (kk.org) later. Frankly, my little blog doesn’t get a great number of hits but more come from here and Kevin Kelly’s Technium section than anywhere else. So hope its okay I give it a shot.

    Personal Democracy: Disruption as an Enlightenment Essential

    LinkedIn: http://www.linkedin.com/in/culturalengineer

      1. Tom Crowl

        I suppose I’ll be finding that out down the road. My name is what it is… but I take your point!

        “Is this guy just a wingnut scam artist or what????”

        I’m not sure if you’ve looked into the concept, demo, etc. or not… but I do believe its a viable and beneficial structure on more levels than may be at first apparent.

        While the ‘face’ of it is built around the potentials of the micro-transaction in political lobbying… (and I believe this will eventually be seen as a fundamental need) the advantages it brings to both sides of Commons-oriented transactions (Charity and Cause related) are readily evident. This is because the account then becomes a stable and reusable point for the User in Commons-oriented co-ordination and action. This has advantages for both sides.

        The resultant network, (which I believe tends towards a natural concentration) by being ‘owned’ by the Commons (quite literally)… and more importantly not dependent on any government for its establishment, growth or support… but rather supported by the private sector on a free-market basis becomes an enormously powerful counter-balancing institution to corporate and financial concentrations.

        But you’re right. I could be all wrong.

        P.S. I’ve noticed a colossal difference between physics and economics. The hard sciences like physics, cosmology, etc. are very open to examining new approaches and ideas that sometimes, surprisingly, turn out to have considerable utility. Economics (and politics!) is chock-full of people who are CERTAIN of their correctness. I suspect this has much to do with why physics makes progress…
        and economics doesn’t.

        Nevertheless Sarge, I’m grateful for any feedback I can get however brief. And based on some of your other comments we may even have similar goals.

        1. craazyman


          For the inherently lazy, distracted and time-challenged among us, can you give a 2- or 3-paragraph summary of your idea. Your web site is verbose, unless I missed the brief overview paragraphs.

          The approach to money we now have is a disaster. But human history is a series of disasters. Not sure which is the cause and which is the effect.

          I’m open to new ideas. A redesign of money is a good place to start.


          1. Tom Crowl

            The Individually-controlled / Commons-dedicated Account*

            *A Commons-owned neutral platform for both political and charitable monetary contribution… which for very fundamental scaling reasons must allow a viable micro-transaction (think x-box points for action in the Commons). The resultant network catalyzes additional functionality for co-ordination of other ‘social energy’ utilization. (P.S. Its the most neutral and ultimately politically viable method for the public finance of elections.)

            It’s might be called a ‘Pooled User-Controlled’ Account dedicated to “Commons” purposes. (In a legal sense, Charity and Candidate/Cause related functions.)

            The first impetus driving the creation of the invention is to allow a viable ‘micro-transaction’ in politics especially.

            E.g. According to the CRP the financial services industry spent $2.3 billion over the last two decades lobbying Congress, Candidates, etc…

            People freak out that Congress has been purchased. Well they’re right. But they came cheap.

            $2.3 billion over 20 years works out to less than a dollar/YEAR per voter.

            That suggests that with the proper mechanisms to organize and channel the ‘social energy’ of we ‘non-organized’ collections of individuals…

            And with an ability for a Citizen to easily tap a key and give say even 25 cents at a particular time for or against a particular issue… some mighty powerful impact is easily producible.

            Again… think X-box points for Commons-oriented action. This is how Microsoft solved the problem of selling ‘electronic goods’ like outfits for your Avatar or whatever. Its a way to handle very small transactions quickly and easily without the User having to constantly re-enter a bunch of info… not to mention that transaction fees would otherwise make that purchase impractical regardless. Its important to mention that there are also reporting requirements and legal limits associated with the political side in multiple jurisdictions that this system can automate and easily handle.)

            Most people never give to a cause or campaign. This is a fact! But its possible to change that by making it easy and by making the account functional for charity giving as well (which most people DO do… at least once or twice a year).

            By facilitating persistence of the account even when de-funded (e.g. a person opens an account with $10 and immediately gives the whole $10 somewhere), a user will likely see the advantages of using it the next time… (this network becomes advantageous for corporate/charity sponsorships… “give to such-and-such and print out a coupon for a free roll of film at Target!)

            Now assuming that there’s utility to such a capability, and that it has some capability to attract a fair sized user-base (and I actually think it tends towards a natural concentration)… we also then see that the legal structure
            under which it operates can ‘itself’ become a tool.

            Assuming ownership by the Commons (and I’m somewhat concerned with the specifics of that… this structure itself provides the framework for empowered self-organization and, in-fact, depending on the aims of its user-base could be quite threatening to governments resistant to citizen participation )… the Institution thereby created has a potential to become a counter-balancing force to narrower Corporate interests.

            P.S. I don’t know if its from anything here… but the Founders of the Personal Democracy Forum and the technical director of the Sunlight Foundation just joined my linkedIn network!

            Demo http://www.Chagora.com
            LinkedIn: http://www.linkedin.com/in/culturalengineer

            The FAQ on the Demo and/or an overview on my LinkedIn profile may be helpful.

            The implications are really rather complex but if you let yourself play with the idea of “X-Box points for lobbying” and then ponder how such a network could develop (and why it MUST be a neutral network)… some surprising images may come to mind.

            But then there’s also this!

            As Yogi Bear said:

            “In theory theory and practice are the same. In practice they’re not.”

          2. Tom Crowl

            As to why (and how) the resultant network may form an anchor for developing alternative systems of credit or currency… that’s a little longer story but I believe is likely emergent characteristic of its capability for empowered self-organization while still operating ‘within’ the existing systems. (e.g. think ‘mall-dollars’ or scrip for local purchases but on a larger scale)

            There are some good ideas out there for new currencies. (Some I’ve seen here! I’d like to know more about the “Money Commons”)… but expecting this system to be willingly dismantled or radically altered any time soon is wishful thinking…

            The current monetary system may well collapse! In fact it probably will. But they won’t abandon it until we’re either completely out of it or carrying it around in wheelbarrows (which are both the same thing: ‘social energy’ at war with itself.)

            So some redundancy would be a good idea.

            P.S. Should this “Commons-owned” entity develop… every one on Earth becomes an equal stockholder with actual rights… and that’s whether or not they have an account or even know it exists. My attorney says working out the legal structure for that one may be patentable in itself but that’s not part of the current process. That’s part of the BIG dream.

  8. m.jed

    Banks can still own private equity and hedge funds so long as they do not exceed 3% of core capital. . . . . Nevertheless, Goldman may have to reduce its PE and hedge fund exposure by as much as $10 billion, and Morgan Stanley, $3 billion.

    Yves, can you elaborate on your interpretation of this component of Volcker? As I see it, there’s two components, and it’s not clear. There’s the co-investment component, which was addressed in the language I read – enabling firms to seed new funds as long as they’re not 3% of the fund one year later.

    But what is “capital” of a 1:1 long/short equity hedge fund. You’ve got $100 of assets (the longs) and $100 of liabilities (the shorts) and the net capital is zero.

    Second, the “ownership” of hedge funds/PE in GAAP terms, is of GAAP equity. I’d imagine, given the compensation structure of most hedge funds/PE firms, that the GAAP equity is close to zero. Indeed, a quick look at Och-Ziff’s financials, show $35MM of equity to $1.5 bn of GAAP assets and $25 bn of assets under management. At year-end 2008 they had negative shareholders equity (I’m pretty certain this negative equity had nothing to do with the financial crisis).

    So essentially, the way I interpret this is that Goldman can own a trillion dollar hedge fund from an AUM perspective as long as the GAAP equity and co-investment remain within the 3% of Tier One threshold.

    Any thoughts?

    1. Yves Smith Post author

      I need to see the language of the bill, but my interpretation is that it is the contribution the investors make. So in the LTCM case, where the investor contributions were levered 25:1, it would be the 1, not the 25.

  9. Siggy

    I find Bill Black’s comments to be the most cogent. Unprosecuted fraud will continue whilst the Congress runs amok enacting laws that don’t prosecute.

    The jargon labeled financial innovations of recent years have been nothing more than blatant lies intended to paint over fairly obvious fraud. Best example repo105 reported as a pure sale as opposed to the loan that it really was.

    Or; a nice little CDO that is so constructed that inherent risk is mitigated by some conjured representation of diversity.

    This is theater of the worst form and highest insult to those of us who believe that government should exist to protect the interests of the citizens and not any particular industry group. It’s little more than sound byte legislation enacted by what has become a body of poltroons pandering to a public that is reluctant to hold them to account.

  10. Rex

    “what has become a body of poltroons pandering to a public that is reluctant to hold them to account.”

    I don’t think they are pandering to the public; they are pandering to various money and power groups. And there seems to be no way to hold them to account. A little while back I was “believing in some change” but we are getting none. So voting seems to be able to only achieve a shift between screwed up and really screwed up. What other accountability mechanism does the public have?

  11. MyLessThanPrimeBeef

    If physicians should heal themselves, why shouldn’t reformers reform themselves?

    Instead, reformers everywhere in the world reform everything except themselves.

  12. MyLessThanPrimeBeef

    With regard to credid default swaps mentioned by Marshall, I believe we should adopt

    ‘Too Big To Flail’

    instead of ‘too big to fail,’ as I view them as acts by people flailing about things they don’t quite comprehend, which is, by the way, very typical of Homo Not-So-Sapiens Not-So-Sapiens.

  13. Anonymous Jones

    As a lot of people have been saying, the last three years have been about consolidating the gains of the previous decade, reflating the currency just enough that those who overreached with capital get just enough back from their assets that they feel like they didn’t “lose” anything that they delusionally thought was “theirs.” As you note so well above, this “reform” was just an institutionalization of the present elite banking institutions, a deed of government-certified and protected monopoly over financial services, letting them extract from us as much as they want as long as the people don’t complain *too* much.

    The whole process has been heartbreaking, in much the same way the death of a parent after a long illness is heartbreaking. You know it’s coming, but the reality of it is sometimes a lot to bear.

    1. skippy

      What feeling can be ascribed to the knowledge, our Constitution is abjured to the financial credit pecking order aka the bond holders that count more than most.

      Skippy…now who has_strategically defaulted_on a contract…

  14. Jim Haygood

    Any bill labeled as ‘reform’ is, axiomatically, anti-reform.

    The raison d’etre of the Democratic and Republican parties is to guard the special interests which own and operate them against the threat of reform.

    These kleptocratic, counterrevolutionary dinosaurs are no more going to ‘reform’ their realm than foxes are going to start nurturing baby chickens.

    You want real reform? Enact my proposed Amendment XXVIII to the US Constitution: closing down the US Congress as a failed institution; ending all Congressional salaries, benefits and pensions; and providing for a peoples’ convention to design a new parliament.

  15. sgt_doom

    Let’s be clear on this: this is a brilliant post which encapsulates all the problems with this so-called reform crap.

    From Hirsh’s article,

    “These same banks may end up controlling or at least dominating the clearinghouses they are being pressed to trade on as well,..”

    This should be obvious to anyone familiar with the facts: if ICE US Trust is owned by Goldman Sachs, Morgan Stanley, JPMorgan Chase, ICE and Markit Group, and ICE in turn is owned by Goldman Sachs, Morgan Stanley, Deutsche Bank and the oil cartel guys (BP, Royal Dutch/Shell, etc.), and Markit Group was originally financed (and who really knows who actually owns it given all those holding companies?) by Goldman Sachs, JPMorgan Chase, Citigroup and BankofAmerica, the ownership seems considerably interlocking.

    I’d say it’s a done deal!

    Next “reform” on the agenda: campaign finance “reform” — where everything remains the same….

  16. lalaland

    Alright, here’s a contrarian view –

    What if the financial crisis was more like the Korean Air problems of Malcolm Gladwell’s outliers – i.e. one or two things can go wrong without tragedy, but once you get to the third layer of failure you are tempting catastrophe?

    It did, after all, take us 70 years to completely screw things up to the point of collapse. Critics point to Glass Steagal being watered down or eliminated, but that alone didn’t do the trick – it needed the added catalysts of Greenspan’s interest rates AND refusal to regulate. It needed states to have no mortgage issuing oversight (that’s why Texas is not Nevada now). It needed corrupt borrowers, bankers, regulators, investors and congressmen. It needed Cajas around the world lending to eastern european citizens and endless houses built for Brits in sunny places. It needed a LOT of people believing their own actions would be inconsequential.

    So I think what passed may be *meh* but it wasn’t going to solve the next crisis anyway – it just closed some of the most egregious loopholes (although I think the consumer protection could be fantastic if it pans out).

    IMHO the next financial crisis will be completely and totally different, and will involve totally different ‘financial products’.

    The speed of technology and transactions, the opaqueness of the entire industry and the overwhelming feeling that the banks are in it only for themselves will keep ma and pa investor on the sidelines for a long, long time. If the public (as opposed to the institutional investors) think the game is mostly rigged the financial industry could evolve into two games: one for the super rich to pingpong their wealth around to each other like an endless poker game, and one for everyone else which involves vanilla products and other low-risk ‘normal’ tools of capitalism.

    So financial reform is not the end-all but it’s probably just as well; no reason to stifle sword making when everyone has moved on to guns anyway. Obviously the best thing that could happen is the SEC keeps the pressure on, relentlessly, under there is a culture of normal compliance rather than cat-and-mouse criminality, which seems to be the norm these days.

  17. monday1929

    William Black’s words should be the last on the Bill; once the state of gangsterism is established, parsing words becomes a waste of energies.

    A consolation: this Bill should set a record for the speed at which it is discredited. Assuming the Crash resumes within months the massed Delusional will start to see just how rotten the rot is.

  18. seabos84

    There is a economic-mathematical law about complexity that I made up … the more complexity, the faster I’m getting screwed.

    Seriously – there are only a few basic ways to get money –

    1. I work for you, you pay me.
    2. I loan you money, you pay me a fixed return.
    3. I loan you money, you pay me a competitive future rate of return.
    4. You give it to me.
    5. I buy something for y, and I sell it to you for y + xy, x>0.
    6. we gamble, I win.
    7. ??

    all this tax code / depreciation / texas hold ’em instead of roulette or dice or cutting the deck / growth stock / pork belly futures / circle of gold (a ponzi from the 70’s when I was a teenage busboy) / s&p 500 LEAP puts / CDOs …

    WTF of value does ANY of this shit ad?

    6 ways to make money, 3 tax rates per way to make money, call it a day.


  19. Per Kurowski

    The most important systemic risk driver, that of different capital requirements for different assets, that which drove the banks towards the AAAs since there they could leverage themselves 62.5 times to 1 and, if they made a half percent spread on it, make a whopping 32 percent yearly return on capital on what was supposed to be the least risky; that which led the banks to abandon the small businesses and entrepreneurs, because there they could only leverage 12.5 to 1.. Well that was not even discussed.

    Have you ever heard of a bank crisis that arose in AAA land, from what was perceived as having lower risk? Yes they all have.

    Have you ever heard of a bank crisis that arose from lending to risky small businesses and entrepreneurs? No there’s never been on.

    Does this not tell you something about how faulty our current regulations really are?

    In the 3000 pages of financial regulatory reform, the Basel Committee, the entity that sets capital requirements was not mentioned even once. Does this not tell you something about how crazy it all has become?

  20. MichaelC


    in a word, Yes


    Do you know anything about the exception granted to JPM that allows them to keep Highbridge intact? I saw only passing note of an ‘exception’ in the WSJ. NYT, but no details.

    1. m.jed

      My guess is that it’s not a JP Morgan-specific exception. Seemingly (as per my earlier comment) the banks are allowed to own hedge funds/private equity funds that manage third-party assets. Highbridge, with about $25 bn in assets under management, was acquired by JP Morgan, so it’s likely to have almost entirely third-party assets and fall under the de minimus clause for co-investments made by JP Morgan (partially for returns, but partially to improve alignment with client interests).

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