Dan Alpert's Two Cents

Punting the Bill: Heading into Overtime in the Game of Financial Industry Regulatory Reform

Congressional proponents of necessary reregulation of our financial services industries received a break as the European credit crisis has sent the markets on another retreat from risk, and the zeitgeist is taking a break from the V-shaped recovery crowd. Accordingly, in May, the U.S. Senate was able to pass an omnibus bill that is significantly more far reaching than anything that could have emerged from the dysfunctional legislature only a few months before.

That S. 3217—the Restoring American Financial Stability Act of 2010 (have all the good names for laws been taken?)—covers more than many pundits had thought politically possible is certainly remarkable. Nevertheless, it has been well over a year in coming since the credit crisis’ nadir and, of far more interest to those attempting to understand the bill’s implications, is chockablock with “punts” to the regulations that will follow once the bill is enacted into law.

Politically, it turns out, the Senate bill owes its surprisingly robust content to its ambiguous scope: 1,566 pages that don’t really address how the landscape of our financial system will look. To move the legislation through the various committees that came together to promulgate it, onto and off of the Senate floor (and ultimately, over the next several weeks, through conference committee to pair it off with an even less specific bill, H. 4173, passed by the House of Representatives in December), both the Senate and House effectively leave most of the heavy lifting to future study and regulation-writing by a host of new and existing regulatory bodies. In a piece published today  by  The New  York Times as part of their Dealbook blog edited by Andrew Ross Sorkin, I explore issues left for future resolution.  Among such issues are, alas, several of the most important matters concerning the reregulation of the financial sector:

  • Required Equity Capitalization of Large Banks and Non-banks
  • Proprietary Trading and the Volcker Rule 
  • Regulation of Derivatives Origination and Trading 
  • Credit Rating Agency Reform 

The only practical way to avoid another disaster is to promulgate real limits on the more risky operations and activities of systemically critical financial institutions. The essence of all law governing our commercial interaction rests on limitations—beginning with “thou shall not steal” all the way up to the complexities of banking, securities and exchange regulations. While this Congress can apparently only outline its intentions in the reform bill, only after it is signed into law by the president, the impact on the financial industry—and the extent to which it protects taxpayers—will not be clear until we see how it’s interpreted by regulators. One can hope the latter group is sufficiently chastised by recent history to act forcefully where Congress has been unable to do so, and that even a strongly interpreted regulatory implementation of the pending law remains on the books and isn’t reinterpreted in a resurgence of deregulatory fervor.

Click for the full NYT article: Another View: Punting Financial Reform

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