Funny Business: Why the Financial Reform Bill Has Become a Joke

In a comic turn worthy of the Marx Brothers, Congress has turned to -- who else -- taxpayers to lower the curtain on the opera buffa known as "financial reform."

With Sen. Robert Byrd's death putting passage of the legislation into doubt, lawmakers are trying to buy off Sen. Scott Brown, R-Mass., by dropping a provision under which Wall Street and hedge funds would've paid some $20 billion in fees to fund the bill's implementation. Instead, House and Senate negotiators will milk the federal TARP program for most of the costs.

Bravissimo! Why make the institutions that made the mess pay to clean it up when the American public, that perpetual straight man, can be gouged one last time?

It's a fitting conclusion. From the outset, this affair has had more to do with election-year posturing and Beltway brinksmanship than it has with repairing our financial system. The Obama administration is playing its part to the end, allying with Brown in these last hectic days to weaken the Volcker Rule. Congressional Republicans played theirs by taking their financial contributions and going home, first-class, I presume. Enjoy the Tea Party, fellas.

Cue the usual cliches. That's how sausage is stuffed. Politics is the art of the possible. Reform happens one small victory at a time. You can't dance without a partner.

I'm sympathetic to such banalities, having used them all. But let's say they do describe the long march over financial reform. After the signing ceremony is over, we still end up roughly where we started -- with a wobbly financial system dominated by mega-companies prone to shooting themselves, and therefore us, in the ass. Many of the same banking execs who led us on this merry dance remain camped out on Wall Street. No regulators received their marching orders. Accountability? That's for "small" people, slick.

My simple smell test for legislation is that it should do more good than harm. This bill, after passing through the lobbying buzz-saw, does the opposite. Although it contains some worthy proposals, such as creating a (weak) Consumer Financial Protection Agency, the measure as a whole only nibbles at the edges of the problems afflicting our financial system. Meanwhile, the measure's chief solutions are inadequate. A few of the major offenses:

• Regulators will fight systemic risk by committee, a recipe for gridlock even if the Financial Stability Council didn't require a two-thirds majority to order paperclips. Keep in mind that these are the same institutions that failed to spot (let alone stop) the bubble, not to mention every preceding bubble.
• "Too big to fail" financial firms are getting even bigger, largely by exporting their services to friendlier climes overseas. Swallowing the industry line, lawmakers turned a blind eye by refusing to impose tighter caps on big banks' deposits and capital assets.
• Speaking of capital, the fight over how much money banks should hold against potential losses is being punted over to the G-20 and the Basel Committee, which is even more subservient to global banking interests than U.S. regulators.
• Instead of overhauling credit rating agencies, those handmaidens of disaster, lawmakers are simply asking the SEC to study possible solutions.

These shortcomings stand in contrast to the new health care law, another flawed, but ultimately worthwhile, piece of public policy. Certainly, that proposal could've been better. But there's no arguing with enabling millions of Americans to go the doctor. Health care reform also at least triggered industry and political vibrations that, in time, could lead to more meaningful change.

Not so with financial reform. If anything, the measure entrenches Wall Street's control over the financial system, which is like reloading a gun that's just gone off in your face. As Newsweek's Michael Hirsh puts it in contrasting the legislation with Glass-Steagall, the 1932 law adopted to restore order in banking after the Great Depression:

Whereas Glass-Steagall substantially altered the structure of the financial system and required the creation of brand-new kinds of firms, Dodd-Frank effectively anoints the existing banking elite.

Simply stated, the financial reform bill will not prevent another meltdown.

Even the bill's purportedly signal achievements aren't all they're cracked up to be. Take the CFPA. Following the housing bust, there is widespread agreement that people need stronger federal (and state) protections against abusive financial practices. Yet the agency ostensibly in charge of defending us will be baby-sat by the Federal Reserve and other banking regulators, which have a well-documented record of putting financial firms' "safety and soundness" ahead of consumer interests.

Whatever rules the new agency proposes will be subject to veto, which cordons off what the CFPA can do in pursuit of its mission before the agency is even off the ground. After the greatest lending fiasco in U.S. history, lawmakers helped banks preemptively neuter the agency by barring it from laying down basic rules about the kind of products companies offer.

The agreement on derivatives betrays a similar lessening-by-compromise. Yes, banks will have to enclose certain swaps within a separately capitalized unit. But most derivatives will still trade directly out of banks, not their affiliates. The bill also doesn't require banks to quarantine CDOs, the securities that helped cripple AIG, while allowing Wall Street to retain its monopoly over the clearinghouses expected to stabilize the swaps markets. The shadow banking system lives.

More broadly, regulators will have to make judgments about whether derivatives are of the nasty, speculative variety or the more benign species used to manage risk. Writes Heather Landy of the American Banker (not usually mistaken for Mother Jones on such matters):

In other words, unless regulators take an unusually hard line as they make and enforce the rules that Congress has left up to them to implement, not much will change for the banks most active in derivatives, because their concentrations typically are heaviest for interest rate and currency swaps, which look to be safe to stay where they are.

Image from Flickr user Stefania.Checchin Related:

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