Reform ! (I think)

The question of whether the Senate would progress the broad array of financial reforms passed by the House in December has been answered in the glorious affirmative. 

Among other things, the Restoring American Financial Stability Act would -

• Create a new consumer protection agency (to be "housed" within the Federal Reserve),

• Create a systemic risk council (staffed by heads of existing agencies such as the SEC and Treasury),

• Enhance derivatives regulation (with jurisdictional lines continuing to be drawn by the SEC and CFTC),

• Require registration of hedge funds (with exceptions for foreign private advisers, venture capital fund advisers, private equity funds not posing a market risk, certain small businesses and those eligible for an intrastate exemption),

• Give shareholders a vote on executive compensation (with such vote being nonbinding),

• Require certain securitizers to keep 5% of their products (with that number being increased or decreased by the SEC), 

• Impose the "Volcker Rule" ban on proprietary trading (on investments that "do not benefit clients"), and

• Impose a uniform fiduciary standard of care (but only on brokers advising institutions on swaps).

Among the notions that failed to muster support are -

• Authorization of private claims against credit ratings agencies,

• A standing fund for future firm bailouts,

• A statutory increase in SIPC protection, 

• The consolidation of banking regulators from 5 to 1,

• A tax on profits to pay for the TARP shortfall, 

• A ban on naked credit default swaps,

• The imposition of a uniform fiduciary standards upon both broker-dealers and investment advisers,   

• Limits on the size of institutions/re-implementation of Glass-Steagall, and

• A tax on excessive compensation.

          My old Professor at NYU liked to say that the SEC "went at a problem with a scalpel, while Congress used a hatchet."  Personally, in light of the compromises still to come as the Senate measure is "reconciled" with that of the House, I'm trying hard not to see the Reform as a largely symbolic gesture.  Overall, I find myself longing for the days of unpredictable, piecemeal, knee-jerk Congressional responses to specific market failures - those laws happened fast and had teeth!

--JSC, 5/24/10