HR 4173, Financial Reform, Out of the House

As you may have heard, HR 4173, The Wall Street Reform and Consumer Protection Act of 2009, passed the House on Friday. It passed still containing a Consumer Financial Protection Agency, after a last minute amendment to replace the agency with a series of regulators failed. The Lynch Amendment (which we discussed here) passed. So a lot got done, especially when earlier this year it looked like Congress and the President were going to let is disappear from the agenda. So why am I depressed?

No Bipartisan Support. Call me naive, but I am shocked that not a single Republican voted for this bill. Not a single Republican. This is an area where recent events have shown us that new regulation is needed. Listening to the GOP leadership attack the bill in the House they seemed concerned with issues like, in the words of Rep. Neugebauer (R-Tx), a new “credit czar” at the CFPA. They were not protesting that the bill wasn’t going far enough. There are baseline regulations needed, from getting derivatives to clear, to having regulators with the ability to have special bankruptcy powers for certain types of financial institutions, that are explicitly supported by industry, an industry this this bill is supposed to regulate. That the GOP would be comfortable going into 2010 without these minor fixes in the pipeline for regulatory reform is shameful, and almost certainly means they’ll be completely unsupportive in the Senate as well.

Watered Down There are OTC exchange exemptions both at the user end and in the definition of the exchange that will let a significant portion of the market through. There’s no size limits on institutions. So much of the regulation will be done in house at financial companies — the living will won’t be put together by regulators, but by the institution, giving us a permanent regime of the uncontested “stress test” numbers from the Spring. Regulators will move Too Big To Fail firms across multiple categories of riskiness. Though I assume they won’t name those categories “AAA”, “AA”, etc., it’s a permanent regime of ratings methodology. There is a large amount of regulator discretion in how to monitor Too Big To Fail firms, which is almost always a bad thing. There’s little to prevent more speculation in short-term repo markets. This isn’t strong enough reform, and it leaves the door wide open for another repeat of the events we’ve just had.

Blue Dogs Dismantling The Blue Dogs dismantled the Consumer Financial Protection Agency — removing vanilla loans, flooring their authority below $80bn, allowing for pre-emption of increased state regulation and scrutiny in the name of smoothly running national banks. And even then it still barely passed an amendment attached that would dismantle it, with a vote of 208-223, with 33-democrats against. That’s nothing like a 60% margin that’ll be needed in the Senate. A simple measure to allow bankruptcy judges to ‘cramdown’ the value of a mortgage in bankruptcy, a small measure in the scheme of things, was also voted down.

It’s ironic that for all the cooling that goes on there, Dodd’s bill in the Senate is significantly stronger. Tighter regulation, less loopholes and a better understanding of how the regulatory agencies need to adopt. Now that the Frank Bill made it out the door, it is likely that the Dodd bill will be made significantly weaker and/or take a back seat to HR 4173.