Banking Reform Legislation Background

So now that we’re done (for the moment) with the HCR, it is on to Banking Reform. This work has been ongoing in the House (who passed a bill already) and Chris Dodd’s Banking Committee. The Congress is in recess now, but it is worth taking some time to get up to speed on the coming issues and the bill itself.

Want to know why we are trying to regulate these institutions and the issues and risks involved? This piece from David Leonhardt is indispensable. And if you only decide to read one thing, make it this article.

Summary of H.R. 4173 — An overview of the House Bill. I’ll try to find a better one, but this bill is pretty flawed and largely enshrines Too Big To Fail. It also does not go far enough to regulate derivatives or CDS and oddly exempts auto loans. It doesn’t deal much with the Credit Rating Agencies, either. Mike Castle voted NO on its passage.

Another Summary from CNN Money.

H.R. 4173 Wall Street Reform and Consumer Protection Act of 2009 — Links (pdf) to the bill itself.

Summary of Chris Dodd’s Reform Bill — This is the bill that Chris Dodd rescued from endless negotiation to start passage to some floor debate. This bill, too, has its flaws, notably that it can’t quite wrap itself around killing off Too Big To Fail, either. This bill calls for a Financial Stability Oversight Council which seems to have some broad charter to monitor financial institution activity and can create some rules for itself for actions based on that monitoring. If you try to think about what this body might have done in, say, 2003-2005 timeframe, you might get a sense of the problem here. When everyone is making money (especially in a housing bubble) and feeling wealthier, how does a group like this manage to take away the punch bowl? Without some clear rules to abide by –most especially leverage limits — it is going to be far too easy for this group to just capitulate to pressure.

After our own Senator Kaufmann pointedly told Dodd that his bill simply did not address Too Big To Fail, Dodd acknowledges this issue, but makes no commitments to try to fix this. There is still time to make this alot better, but banks themselves are spending lots of money to water down this regulation. And republicans, oddly, are gearing up to defend the banking status quo. More on this later.