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Ogden Nash said that progress is good if it isn’t overdone. I’ve long felt the same about transparency as my following verse indicates.

Transparency is a current central banker cause

But it reminds me too much of sausages and laws

I think translucence, like my shower door, is a good compromise

It lets in the light, but keeps out the flies.

Watching laws being made has become more distasteful than ever, especially banking laws, in an environment where lawmakers compete to outdo each other in the popular sport of bank bashing. Reasonable, thoughtful, financial reform legislation is probably needed, but being reasonable and thoughtful risks being labeled as soft on banks. Soft on banks and soft on Wall Street are two different things, but such distinctions are risky in the current competition to win the populist of the year award.

Under normal circumstances, shining light on the legislative process is probably a good thing—if not overdone. In the current poisoned environment, however, the TV cameras only add to the dysfunction. Our only hope of having the few adults in Congress exert a moderating influence in the reconcilement process is to turn the cameras off and have the meeting in a dark smoke-filled room.

Since Wall Street investment banks (present and past) are not the same as Main Street commercial banks, we had harbored some hope that the efforts to punish the former might spare the latter. However, that was hoping for too much.

Two recent developments, if not stopped or reversed, promise to do much damage to the entire banking system, large and small, and thus the economy. One is the recent announcement by the Financial Accounting Standards Board [FASB] of their intention to apply mark to market accounting rules to banks’ entire balance sheet, including loans as well as securities. The only way I can understand this is as retaliation by an out-of-control agency that was embarrassed last year by their submission to Congressional pressure to modify (slightly) existing M2M rules for banks, and the success their forced reversal had. They are back, mad, and doubling down.

The other misguided effort, if not reversed, will hit community banks like a ton of bricks with no obvious benefit to safety and soundness. That is the amendment, sponsored by Senator Susan Collins, to exclude trust preferred securities from Tier 1capital of banks and in the capital calculations of small bank holding companies. Senator Collins said she didn’t intend for her amendment to affect the capital treatment of small bank holding companies. If so, the amendment was a mistake that passed the Senate by unanimous consent (voice vote).

Banking regulation is serious business. It is complicated, and fraught with abundant opportunities for unintended negative consequences. Until this orgy of bank bashing subsides, let’s turn the cameras off and bring some experts into the room. These days transparency is not Congress’ friend.

Source: Transparency Is the Enemy of Financial Reform