The FINREG Bill Disaster

Well, as we awake to the last day of this week, we can all thank a clueless Democratic Congress and a spineless Republican one for passing the most misguided and ineffectual financial regulatory "reform" in years.

As I've written in prior posts on either this or my companion political blog, a country that allows bribe-taking, retiring Senator Chris Dodd (D-CT), in collaboration with Barney Frank (D-MA), the Congressman who rewrites history in an attempt to hide his gross failure to oversee Fannie and Freddie, to author such sweeping, flawed legislation gets what it deserves.

First, the regulation omits any mention of the two most egregious sources of financial excess in the past few decades, Fannie Mae and Freddie Mac. Prior posts have spoken to their immense lobbying clout, which has bought these two horrors the votes of hundreds of elected members of Congress.

Second, nothing in the FINREG bill will or can prevent yet another financial crisis of the type experienced a few years ago. Larding up ineffectual regulation of commercial and investment banking and consumer lending with yet more layers of ineffectual and confusing regulation won't solve anything.

Third, the so-called Volcker Rule got watered down and loopholed, so that deposit-insured commercial banks can still do some derivatives activity on their books.

There was a long discussion of the technical aspects of the loophole this morning on CNBC. In short, the law is vague on how and when a commercial bank's derivatives positions are part of servicing a customer's position, or part of its proprietary book.

The on-air anchors and reports argued that this is a tough call to make.

It's not.

In reality, it's incredibly simple. Put any derivatives activity in a separate subsidiary which is 100% equity-financed and unable to be "bailed out."

This notion that somehow a bank can't figure out if its derivative position is on behalf of a client, or not, is nonsense. Client funds and positions are in client accounts. Bank positions aren't.

Got it?

Once again, Congress gave in to big banks and let them have a loophole through which they will, in time, exploit subsidized risk-taking in proprietary derivatives activity.

The larger issue here, however, is that the US economy and nation has been, once more, ill-served by a supine Republican party in Congress that is afraid to take the real issues to the public and stop bad legislation, while the Democratic party in Congress continues to believe that the same inept regulators, given more pages of obscure law to interpret, will do any better in the future without a fundamental reform of the GSEs and the belief that the federal government will bail out excessive risk taking by sufficiently large private sector financial companies.

This legislation will only harm the financial sector and the US economy over time, if for no other reason than it continues the state of denial by government concerning what really drives financial crises.