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Speculating Banks Still Rule -- Ten Ways Dems and Dodd Are Failing on Financial Reform

None of this is reform. We are better off with nada than vapid promises and a false sense of security.

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1) It won't make the biggest most "systemically important" banks (read: systemically destructive) any smaller. It won't even reduce the size of banks like Bank of America and Wells Fargo that are operating with more more than 10 percent of U.S. insured deposits -- a limit currently imposed by law. Instead, it will add another 10 percent liability cap that banks can ignore, allow the Fed to keep selectively merging banks, and then create a new council to determine still more concentration limits that can subsequently be ignored. Regulators had plenty of power going into the crisis. Congress needs to force them to exercise it, and force a breakup of the biggest banks, now. Those that failed the economy last time around cannot be expected to get it right next time with an expanded set of powers.

2) It won't reduce the economic danger from rampant, overleveraged trading activities. The bill would restrict certain banks from having proprietary trading operations (trading with their own capital) under the "Volcker rule," but it's full of problematic exemptions:

a) Banks that claim they trade on behalf of their customers (which they all say they do) escape the rule.

b) Banks that trade for "market-making" purposes (i.e. Goldman Sachs betting against its own clients) are home-free.

c) Banks aren't required to itemize their trading operations to regulators, so they get to decide what they consider trading for their customers and what they consider proprietary. I wonder how that will work out.

 

3) It won't change the nature, transparency, size, complexity or usage of the most heinous derivatives. Why? Because the derivatives that are not standardized or over-the-counter (OTC) will not be required to be traded on regulated exchanges, though they may have to show up on trading depositories (private entities, whose boards are comprised of bankers).

4) It won't prevent the creation of new toxic assets. It will require issuers of these assets to retain 5 percent of any package they sell off to investors (keeping some skin in the game), but there is no way to monitor which 5 percent is kept, and even that rule has a bunch of embedded exemptions.

5) It won't contain the risk to the shadow banking system from hedge funds, private equity firms and venture capital funds. Venture capital and private equity advisers still won't have to register or report to the SEC, though hedge funds with over $100 million in assets will. There's also no statutory definition of what actually constitutes a hedge fund, and the bill doesn't close the tax loophole that allows fund managers to be taxed at the lower capital-gains tax rate of 15 percent, rather than the higher income tax rate of 34 percent. If it sounds crazy to you that the richest people in
America
are being taxed at the lowest rates, it is: the loophole cost taxpayers about $5 billion this year alone.

6) It won't remove the conflicts of interest between banks that issue securities and rating agencies that rate them, and get paid a fee for doing so. Rather than nationalizing the rating process for these unconstrained securitized deals, it would create a new entity (Office of Credit Ratings) within the SEC to examine rating agency practices and methodology annually and at some point in the future, issue rules to keep sales and marketing considerations from influencing ratings, leaving a lot of exemption room. The SEC had authority to regulating the rating agencies before the collapse, and it didn't exercise it.