- Financial reform legislation passed Congress Thursday—now lacking only President Obama's signature, it's pretty much a lock.
- The legislation contains mostly studies and minor annoyances for banks—and doesn't target the drivers of 2008's financial panic, real or perceived.
- As Senator Chris Dodd said recently, "No one will know until this is actually in place how it works."
- In the end, it appears the goal wasn't true reform but, rather, scratching the itch to "do something" for political gain.
Hours after the Senate overrode attempts to filibuster the financial reform bill, a 60-39 vote approved the legislation, putting it before President Obama. This brings the bill one step closer to becoming law—and we cannot imagine a scenario in which the president doesn't sign this.
We've covered this legislation more than once (here and here), and it doesn't appear much has changed since the removal of the $19 billion bank fee weeks ago. Approving senators spoke of the bill's merits—preventing crises, controlling Wall Street excesses, and defending the consumer. But in reading the provisions, it's rather apparent this bill accomplishes little in attempting to stem future crises—or would have been successful in preventing past crises for that matter. Now, there are positives to be gained from this legislation—the greater transparency afforded by requiring some derivatives to be exchange traded is a plus. But on balance, despite all the heated anti-Wall Street rhetoric and discussions of the so-called "sweeping reforms," the result is a 2,319 page bill mostly creating studies and deferring action altogether.
In grading the bill, former SEC Chairman Harvey Pitt gave it an "'F' for failure or, at best, an ‘I' for incomplete" and renamed it, "The Lawyers and Consultants Full Employment Act of 2010." Perhaps Mr. Pitt's comments are a tad harsh, but he has a point. For instance, while debit card swipe fees were taken on directly (was 2008 a debit-card-fee panic?), real issues such as FAS 157, Fannie Mae and Freddie Mac lending standards, and missteps by the government in attempting to stanch the crisis went almost entirely unaddressed. The perceived "too-big-to-fail" issue? It gets a study. The Volcker Rule, seeking to partially reinstate Glass-Steagall separation of banking and brokerage operations had its teeth removed—a common theme running throughout the bill. Moreover, some of the terms used in the bill need their own study to legally define, like "proprietary trading."
As Senator Chris Dodd said recently, "No one will know until this is actually in place how it works." Maybe, but that's not a sign of well-crafted legislation. True financial panics like 2008's were extremely rare in the last 50 years. Decades could pass before winds of another blow—which is about the only time these many studies' results and feckless reforms will be tested.
Perhaps White House spokesman Robert Gibbs had the most accurate commentary, saying, "This will be a vote that Democrats will talk about through November." So it seems in the end Congress has taken a politically motivated step in the direction of "just doing something," whether or not it represents real improvement of existing regulation. At least it's good to know little has changed from the norm in Washington. With "reforms" formalized in a bill, markets can move beyond the uncertainty generated by fear of reform. Though politicians probably disagree, this is likely the largest positive coming out of the passage of financial reform today—it grants investors more opportunity to refocus on today's economic realities, including high corporate profitability, healthy balance sheets, and fast Emerging Markets-led growth.