Wednesday, April 21, 2010

An Analysis of the New Financial Bill Firming Up

Here is a comparison of the House and Senate versions:
http://www.nytimes.com/interactive/2010/03/16/business/financialreform-billcompare.html?ref=business

My quick take is below (write back to tell me what you think):

-Consumer Protection Agency: The House version is stronger, but the Senate version is better in one point if the Fed can finance the new agency (since the Fed has nearly unlimited funds), as opposed to Congress which tends to weaken such agencies, like the SEC, in booms by cutting funding.

-Systemic Bank Failure: The House bill is better in all parts. The GOP wants to kill the bank tax Fund, but it's a very good idea and the Fund should be large (like the Fund for failing pension plans that the PBGC runs, it will prob. end up too small). Will be interesting to see if the Dems compromise.

-Fed: On balance, both are OK. My very personal view is that the Fed needs to be better regulated on its credit allocation decisions (they need to keep clear documentation on why certain firms were favored and not others).

-Derivatives and Credit Ratings:
The House bill is better. The best way to police ratings agencies is to let consumers sue them and let more Firms get the official designation. Both bills are too soft in mind. All derivatives should be on exchanges, and some derivatives should be banned (like most CDS). Both bills carve out fairly large exceptions, will end up swallowing the rule in time.

-Governance:
The Senate version is better. The big issue is proxy access to let shareholders nominate competent directors that aren't picked by the current CEO, who tends to control the current board.

-HFs and the Volcker Rule
(stating banks can't have HFs or PE subsidiaries): A very important rule. The Senate plan is better because it has the ban, but the House plan is deficient. I've had dinner with 27-year old traders at big banks (Lehman, Bear, GS) with $300mn+ trading books doing some very risk derivatives trades and such, basically doing a one-way bet with other people's money. Fine in a HF context, but not in a large bank with dumb mule depositors, shareholders, and creditors who don't understand what those VaR disclosures mean and what is left unsaid and unknown. The House rule is better to exempt VC and angel firms - the regs shouldn't apply to them and will just be onerous on startup funders.

-Securitization:
The Senate version is better. I don't think securitizers need to hold on to anything, or have any skin. The key is that the buyers of the product need more transparency on everything. Usu. the problem is that the underlying securities are opaque and come with scant documentation. Standardization for the different products, along the lines of SEC requirements for equity reporting, would be key.

-Key missing element:
I demand stronger capital requirements for the large banks! I don't want the Fed to have discretion in setting this. I want a bright line rule (10%, 15%, etc.). The SEC was bought off in 2004, by none other than Paulson at GS (when he was a CEO and not T-Sec).

The bills aren't horrible, nor are they great. I'd give them a solid "C", a fair first attempt.

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