June 25 (Bloomberg) -- Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said.
The ink is not yet dry and there's no vote yet on exactly what this bill actually is and does. I'll be doing my usual analysis once I have an actual stable copy.
But what I can tell from watching CSPAN until the wee hours, and following the process as closely as I reasonably can without crawling up Barney Frank's skirt, this is what we got:
- Banks will have to spin off SOME (but not the important parts) of their derivative operations. The parts they care about (and on which they make the most money) are not credit-default swaps, they're interest-rate and FX swaps. Those are pretty much left alone, and that stinks. Bet on them trying to find every possible way to keep those "custom" as much as they can and thus off exchanges, even though that's almost entirely bogus and intended only to rape the consumer of those products by hiding price discovery.
- Investing in hedge funds is a red herring. Controlling them is another matter, and might in fact be worthwhile reform. We'll see. Color me skeptical on this one until I can read the ACTUAL text as passed.
- It appears that language that would prevent banks from taking positions opposite to their clients (as opposed to hedging market-making risk) has survived. This would prevent the Goldman-esque game played with various CDO structures. Again, I wait until I can read actual language before I call this good.
- Increasing capital is good. Not forcing that capital to cover all unsecured lending is bad. The attempt to split the baby and keep the "credit leverage" game is clear in the legislation, but so far nothing they've tried has made that actually work, nor do I think it can. Thus, the major factors in the instability we experienced remain intact and that's bad.
- Fannie (FNM) and Freddie (FRE) are left out of it. That's horrible. I know the banks went bananas on the possibility they'd be constrained, but they need to be constrained and the banks need to be forced to pay for their part of interacting with Fan/Fred and causing this mess. Not in this bill it won't, and that sucks.
Much of the bill also won't do anything immediately, as it "enables" rather than directs in and of itself. That's very bad, as the regulatory capture process remains intact. What actual regulations will come out of this remain an open question.
On balance: Better than no bill, and Judd Gregg claiming that the bill is a "disaster" and will "dramatically contract credit" is just pure garbage. What it will do is stop a small amount of unsupportable and unsustainable lending, but nowhere near enough of it. It will not stop excessive risk-taking and risk-layering. The capital requirements aren't stringent enough, the "Volcker Rule" was watered down to the point of being of little effect and the derivatives regulation was eviscerated.
Oh, and nowhere that I can find - thus far - is there an "or else" for either a bank or a regulation for violations of the law.
On balance, thus far, I call it this:
All bun to (try to) soothe the masses and electoral anger, no beef.