Friday, 21 May 2010

American Government Initiates Further Controls of Financial Markets

This is a big deal. A very big deal, which is why it is sticky on top for the rest of the day. When this is signed into law it will give the government sweeping powers over multiple aspects of financial markets and commerce. This is a big deal, and not getting nearly the attention it should.

Wall Street Journal:
The legislation passed the Senate 59 to 39 and must now be reconciled with a similar bill passed by the House of Representatives in December, before it can be sent to President Barack Obama to be signed into law.
The controversial measure, supported by the Obama administration, sets up new regulatory bodies and restricts the actions of banks and other financial firms.

"It will inevitably contract credit," said Sen. Judd Gregg (R., N.H.), who says the Senate bill "is probably undermining the system…probably making for a weaker system."
The Senate bill, meanwhile, includes a provision that would essentially force banks to stop "proprietary trading," or making market bets with their own capital. It would also make it more difficult for big banks to grow, by setting new limits on the amount of liabilities they can control.
If a bank does fail, both bills would give the government more power—and resources—to break up the collapsing companies. Among other things, the House bill would create a $150 billion fund, financed by big financial companies, which would be used to unwind failed firms. The intent is to prevent taxpayers from having to pay the tab.
But opponents of the measure worry that regulators might be tempted to use the fund to prop up a failing firm. So the Senate bill has provisions under which a company would be liquidated and the bill for the work would be subsequently paid by a levy on large financial companies.

For consumers, the House and Senate bills would expand protections, creating a new regulator with the autonomy to oversee a range of financial companies, from federally regulated banks to small finance companies.

A couple of amendments that many said looked promising Thursday afternoon didn't make it into the final bill, including a proposal to exempt auto dealers from oversight by the new consumer protection agency, and a proposal to limit or prevent banks from trading speculatively for their own account. And some proposals made it in but are not expected to last long. A controversial proposal slipped in a few weeks ago would potentially force banks to spin off their swaps trading desks, a lucrative source of profits for the five biggest banks, which collectively control 97% of the market in over the counter derivatives trading. That passed along with the 1,500-page Senate bill, but the measure has been criticized by members of the administration and forcefully opposed by Wall Street's powerful lobby.

An excellent opinion piece in Forbes, before the bill passed:
Little thought has been given to that question in the rush to financial reform. But Senate and House legislation would discard 200 years of bankruptcy case law, replacing it with a special, one-of-a-kind resolution authority, managed by the Federal Deposit Insurance Corp.
The agency will soon have absolute authority over failing big banks, empowered to borrow up to 90% of the assets of the companies it seizes and provide unlimited guarantees to "solvent" institutions. Click here to read the rest.