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Senate passes HR 4173 finance reform conference report

by Linda Beale
crossposted with Ataxingmatter

Senate passes HR 4173 finance reform conference report
[updated to add information on Geithner’s opposition to Warren 7:12 pm]

On a 60-39 vote, the US Senate passed the Dodd-Frank H.R. 4173 financial reform conference report today. While the bill imposes some new restrictions and creates a consumer protection agency, most of the impact will come (if it comes) through regulation as the new systemic risk council oversees bank issues and decides whether activities of banks pose sufficient risk to be regulated or eliminated. Capital requirements and leverage requirements, for example, are not directly set in the bill. The US is likely to settle with the capital and leverage standards set by Basle III, the discussions going on now at the Bank for International Settlements regarding updating of the 2004 standards. In those talks, thje banks lobbying are making inroads on the fairly tough standards originally proposed in December, as officials yield to fears (cited by the banks) that tough capital and leverage requirements will dampen the economic revival. See, e.g., Damian Paletta and David Enrich, Banks Gain in Rules Debate: Regulators Seen Diluting Strictest New ‘Basel’ Curbs; Credit Crunch Fears Remain, Wall St. Journal, July 15, 2010, at A1.

Query whether we have learned anything from this crisis at all. Officials remain at the mercy of banks–bailing them out, providing cheap cost of funds through implicit and explicit guarantees, and letting, even encouraging, them to get back to the old securitization games that allowed them to generate liquid and easy credit without adhering to prudential banking standards since the lender was not the one holding on to the loans over the long term. Banks argue for remaining entangled with their profitable proprietary trading and derivatives businesses, since they know that the synergies of being able to use cheap depositor funding for their investment-banking activities means high profits for them, even if it may mean socialization of losses down the road. See Simon Nixon, Barclays Capped by Regulatory Risk, Wall St. J., July 13, 2010, at C10

Interestingly, Tim Geithner has come out against having Elizabeth Warren appointed as head of the new consumer protection agency created by the reform bill. Nasiripour, Tim Geithner Opposes Nominating Warren to Head new Consumer Agency, Huffington Post, Jul. 15, 2010. Having watched Prof. Warren in action and read the scathingly honest output of her term at the head of the bailout watchdog commission, I can’t think of a better person to head the agency. One suspects that Geithner is concerned about a gradual erosion of the power of the Wall Street clique (Geithner, Summers and Bernancke) with the forceful Warren on the job with the ear of the President. Personally, I think that power needs to be eroded, so Geithner’s concern makes Warren an even better choice.

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