ND20 FinReg Reactions: Elizabeth Warren, Mike Konczal, Marshall Auerback
Last night the Senate signed off on the financial regulation bill by a 59-39 vote. Next step: the bill will move to a conference committee where it will have to be reconciled with the House bill. The Senate bill is big (1,500 pages). It’s unwieldy. It’s full of compromises. Is it enough? What works? What doesn’t? To help you navigate the murky waters of financial reform, we asked ND20 contributors to give us their take. ** Stay tuned for more reactions…
“No bill that deals with big issues is ever perfect, but the Senate’s Wall Street reform package will go a long way toward preventing the kinds of abusive practices that brought our economy to its knees. Getting to this point was a tough slog, and President Obama and Chairman Dodd deserve a lot of credit for producing a strong bill.”
The best point of comparison for the Senate Bill is the House Bill, HR 4173, that passed last December. Resolution authority is a little bit weaker than what reformers were able to achieve in the House. There is no equivalent of Miller-Moore’s amendment for unsecured creditors in a resolution. A lack of a leverage cap also means that there is no fencing on what the
regulators can do with their discretion. Collin’s amendment on capital ratios is better than what the House got, since it really focuses on high quality capital.
The Senate’s consumer protection bureau versus the House’s CFPA is a trade off; the House has a new agency, but there are a lot of carve outs for auto dealers. The Senate version is housed at the Fed and the risk council has a veto over its actions, but is a pretty pure version of what reformers wanted given that.
Derivatives in the Senate is still up in the air. Section 716 would be major change, akin to a 21st Century Glass-Steagall, however it will come under massive lobbying attacks in conference.
Given what they wanted this bill to do in regards to Too Big To Fail — give regulators more legal powers in a crisis, and expand prudential regulatory powers — it’s fairly good. But will that be enough?
On the Volcker Rule (which restricts banks from making certain kinds of speculations) there are so many allowed exceptions that the rule is meaningless. There are two things that could be done right away which would be far more effective than anything passed by Congress. On the issue of securitization, the standard securitization structure takes the form of a trust or what is called a “special purpose entity”. For all intents and purposes these are the equivalent of an investment company. Investment companies are normally subject to registration under the 1940 Investment Companies Act. However, the SEC has ruled (3a-7) that a special purpose entity that issues fixed-income securities or other securities which entitle their holders to receive payments that depend primarily on the cash flow from eligible assets will not be deemed to be an investment company and is thus exempt from registration. The 3a-7 exemption also provides that the securities sold by the securitized structure be rated, at the time of initial sale, in one of the four highest categories assigned long-term debt by at least one nationally recognized statistical rating organization. But such fixed-income securities may be sold to qualified institutional buyers as defined in rule 144A. This means that the securities issued by an unregistered entity do not have to be registered or performance reported, with all due diligence undertaken by a nationally recognized rating organization.
Also, since we’re not yet ready to get rid of credit default swaps, let’s take Wall Street at its collective word. It claims that the CDSs are in effect a kind of insurance to hedge against the underlying reference securities. So let’s get rid of the rule which exempts them from state insurance regulation. Regulate them like insurance entities and force the dealers to come up with a full method of provisioning in the event that someone has to collect on the ‘insurance’. Of course, this is likely to make the credit default swaps uneconomic and unprofitable, but it’s better than the alternative of using trillions of dollars of government funds to underwrite these horrible financial Frankenstein type products.