The Fourteenth Banker Blog

June 29, 2010

Fine Print Weakens Bill

Filed under: Running Commentary — thefourteenthbanker @ 1:35 AM

As the details emerge on the financial reform bill, it becomes apparent that it will do little to avert another financial crisis in the coming years. Huffpo notes the same regarding certain provisions of the Volcker Rule, intended to limit trading risks.

Specifically, there are varying implementation periods for the reduction in trading riskier asset classes. See Bloomberg article for details.

CNBC notes that the bill is likely to get weaker not stronger as delays mount and with the death of Senator Robert Byrd taking away a key support vote. The “bank tax”, may be eliminated to win Scott Brown’s support.

The bank tax could have been a small, but nice and clean way to penalize excessive risk taking. Instead it got muddled up with other provisions and now it is likely to be swept aside altogether. This is not that material in the scheme of things, but it would have been another nudge towards safety and soundness.

The biggest problem with the bill is that implementation delays and study periods followed by regulators discretion mean that the system will do little to strengthen itself even as global financial markets founder.

The Lincoln Derivatives amendment as now written allows the “bank” (deposit insured financial institution) to trade in interest rate swaps (like those sold the Greek government and Jefferson County). Foreign Exchange, Silver, Gold, hedging instruments, and investment grade Credit Default Swaps. That is a hole big enough to drive a truck through. Investment grade CDS become non investment grade in a crisis. I would like to see how regulators intend to monitor this.

Finally for today, the modified Merkley/Levin allows investments in Hedge and Private Equity Funds up to 3% of Tier 1 Capital. Given volatility, my guess is that this is a real 1% capital exposure at a minimum, and more if a liquidation cycle is triggered such as it was in 2008 with Lehman Brothers. So there should be other ways to increase bank capital or reduce the incentives for risk taking.


  1. If a group is to be penalized the natural inclination is to obliterate the people trying to penalize the group. The purpose of power is to impose your will on those that must comply with your desires. The founding fathers, as oligarchs, well understood both ideas. They did not wish to be unduly penalized in their power and they feared imposition of power by the more powerful among their fellow oligarchs. Then, the power of the labor revolt was underway in France and they feared the masses too.

    The system based on these fears makes it very difficult to impose power losses on the oligarchy. Right now, the oligarchy is not the capitalist which has been largely collectivized by the idea of public ownership of capital. Add that public ownership is the vehicle of making private gain by trading movement. Taking all this into account, the point of oligarchic power is the employee that dominates the collectivized capital unit.. corporations and funds of various stripes. Deposit guarantees at banks secure collectivization of retail capital generation.

    My sole point here is to point out that power resides in ” control employees” no different than any state bureaucracy that has existed for thousands of years. We have William Black coining a phrase for the principle device of maintaining employee power oligarchies… Control Fraud.

    So, back to the Finance Bill reconciliation process. Virtually every structure and political belief centers on limiting the state. But, a limited state will eventually fail at creative successful solutions to geometric? increased problems from complexity. This natural progression is caused by oligarchic protections of turf at just the point where problem solving is critical to ameliorate the rapidly increasing unintended consequences of complexity.

    The evolved parliamentary system and the political propaganda apparatus accompanying the parliamentary system to force failure to act as the normal consequence.

    The political emergency involving finance is no longer of sufficient to force setting aside politics as usual.

    Will the bill fail? There would be a lot of relief if it were killed off by a death. None dare admit that though.

    As always, political arrangements collapse from suicide of the oligarchs that run it.

    Comment by Jerry J — June 29, 2010 @ 1:30 PM | Reply

  2. Assuming the Finance Bills reconcile and are passed, how long would it take for effective implementation of Regulations let alone for regulations to induce the proper effects on big finance?

    Our major problems were induced by past non regulation. The financial assets created before any new finance regulation are factually Retail Accounts Receivable owed someone that have been hypothecated a number of times creating a chain reaction for failures to collect retail accounts receivable.

    I read today that it ” could” take $1 trillion in taxpayer costs to cure the Fannie Freddie problem. The constant propaganda is that taxpayers will pay for these financial system costs. Nope. Whatever costs required will be paid for by selling Treasuries. Treasuries, that by definition will only roll over perpetually as they do now and have long done. Whatever costs the taxpayers incur to salve F&F will be funds used to buy back assets guaranteed others or to float new real estate loans. Hence, the bulk of the costs will really be to buy assets that will include losses. That part of the purchased assets that remain viable will generate cash flows to allow F&F to distribute funds to the USG. Those funds will easily cover interest due on the debt. Now, F&F both have long experience in reworking loans it buys back to fulfill it’s guarantees. Their long term sucess rate on curing defaults runs between 85 and 90 %. Ok, they have crap now compared to the past. Rework traditionally what is curable traditionally. As for the rest. Get creative. Instead of selling these really bad loans, take fast title and drop them into a local area REIT where they become rental units at just below local market serviced locally. Here is a new service area for grifting to success. Success is cash flows generating the desired result here. Cash flows that go back to F&F to the government which could use the cash for general ops.

    My point is that the taxpayers would have nothing coming out of their taxes barring total economic chaos. That being the case, very few would owe taxes and thus they again are not stuck as taxpayers since they will be unemployed or on reduced incomes. The government would have fallen. The taxes owed after that will be to a new state controlled by a rearranged elite participation.

    Political and economic clarity of consequences of facts as they are now must develop before we are out of the woods on the present very long coming crisis.

    Byrd dead, Feingold no and Brown no with others wavering says what?

    Comment by Jerry J — June 29, 2010 @ 3:17 PM | Reply

    • Years to take effect and only then it begins to phase in. Linked articles spell it out. Since it is a long term implementation you would hope it is a powerful solution but it is not. In fact, it could be rendered moot before ever in effect.

      That is why I keep going back to individual responsibility. That is our only real hope.

      Comment by thefourteenthbanker — June 29, 2010 @ 5:39 PM | Reply

  3. The imminent systemic financial system problem will have long blown up before new statute regulation is even organized sufficiently to begin to be of value. Then it has to be litigated. Example. I ran across a piece on MSNBC this morning that discussed the Red Tape that has been holding back oil spill clean up in the coastal marshes using oil eating bacteria. The biologists have a huge stash of the bacteria prepared for immediate use but the top dog Fed Bureaucrats are sitting on approval to contact and consult with Louisiana top dog bureaucrats who together must approve the commencement of use of the bacteria. The biologists waiting are from the universities including Louisiana State University. The core problem: Louisiana has no funding to pay for the bacteria, even though BP will make good, until after July 1, 2010. Thus a few weeks advantage have been lost due to the Federal System itself. Apparently, even Gov. Jindahl is unable to move this red tape block legally. The bureaucrats must break the law to circumvent this blockage and they would be perfect personal idiots if they did so. How about BP just buys the stuff and gives it to Louisiana? BPO too would be a fool to break the law since the AG is looking for any excuse to do perp walks.

    So,failure abounds from protecting liberty by ham stringing the state?

    This same problem, in principle, surrounds every regulatory act. All this is eerily similar to the problems that did in the USSR. Right off, the arch Marxist Ernest Mandel’s idea that Soviet bureaucracy was just a new exploitive mode of production. The US has the same problem in that the production despoilers are the top dog bureaucrats in publically held business and government top regulatory bureaucrats.

    The US system will cave in from inability to act in time just as the Soviet system blew apart.

    It will take a US Peter the Great to force sweeping abandonment of past practices. Even then, Peter hardly bought more than a couple of generations before even worse bureaucratic rigidities set in.

    Comment by Jerry J — June 30, 2010 @ 3:42 PM | Reply

  4. While I take Jerry’s point, what is the alternative? Every man for himself and God for us all?
    Regulations aren’t ALWAYS created just to give some bloated bureaucracy a reason to be. Companies, as we are constantly reminded, aren’t in business to worry about human health and safety, but to create profits for their owners. If they aren’t forced to engage in safety procedures by making it more costly than doing nothing, they’ll do nothing. They will pass the cost on to us anyway, so if I’m going to pay for something, from clean water to “safe” financial products anyway, I’d rather have a reasonable expectation that the provider has an incentive to do the right thing and provide a safe product. I sure know I can’t depend on their moral character.

    Comment by Sandi — June 30, 2010 @ 4:25 PM | Reply

    • I came across this today. The premise is that the fundamental structures of non individual legal entities work against individuals. That there are really two groups, individuals and institutions. In giving institutions personhood and the legal rights of persons, they have become too powerful. I think this is simplistic but is nevertheless onto something at the core of our problems. There needs to be a third way. Some states have created new business structures that are neither non-profits, nor for profits. The recognize characteristics of both. There is a need to make a modest profit while serving a social purpose. So accepting that legal alternatives can be developed, perhaps we need to change this institutional versus institutional duality. The legal personhood of the institution must be limited and the personhood of the individual enhanced. I’m not sure how you get there from here but I do believe it is key to material change. We should not have to “run out of steam”.

      Comment by thefourteenthbanker — June 30, 2010 @ 10:14 PM | Reply

      • Yet, we really have run out of steam under present organizational circumstances. That is evident because fewer and fewer state induced even corporate induced changes work out positively for society at large. The key is to understand that the impotence is mutual and is based on being unable to understand conflicting value judgements within the society. The state is structurally unable to settle an issue. This adds ever more confusion , delay and expense to problems. Frankly, inability to settle issues adds like stone weights piled on a criminal being pressed to death in barbaric fashion.

        We have a terrific example in the recent Supreme Court Second Amendment case MacDonald V. Chicago. The competent long term authority , agreed so by implication since 1789, held you have a right to keep a gun in your house for self defense. Straight out. The limitations examples the SC set forth are cogent. Yet, Richard Daley wants to make it so difficult to have a gun in your home that the right is curtailed by bureaucratic overburden. He claimed they will get 95 % of what he wants that way. Competent authority to settle an issue is rendered useless by political beliefs . Another burden added to the various state components. Endless litigation since their is no heavy penalty for challenging the competent authority and losing. Adversarial thinking is now so practically dominant that every confrontation is discussed as battle.

        Nothing is ever settled sufficiently to timely build upon any given settlement to cure destructive problems. Time has probably run out on most issues from a practical perspective. No long term policy decisions can be made. They never reach critical mass . So, we flounder on and on, from failure to failure of the state. The corporate planner knows well how to use that to their natural advantage.

        Comment by Jerry J — June 30, 2010 @ 11:06 PM

  5. My interest is looking into systems as they really are, and usually always are,from the societal perspective. It always comes as a surprise to most people that points are reached where no system of societal regulation works. As Jared Diamond sub-titles his book “Collapse” ” Why Societies choose to fail or succeed”? Another thinker on this subject is Joseph Tainter, who in his book ” The Collapse of Complex Societies” contends that the greater driving development is that societies that get too complex reach a point of diminishing return where the future result attained is no longer worth the effort required to be put in by the society. Another thinker is the Indian philosopher P R Sarkar who develops a cyclical answer in his Social Cycle Theory. My view is that all three are mostly correct and are views of the same phenomenon only from different perspectives.

    Has US Society elected to fail? That has been a major interest of mine for a very long time. How does a society elect to fail? My personal answer is short and sweet. We collectively choose failure from loss of Commonwealth. We cannot abide commonwealth losses of dreamy personal freedom. Commonwealth is the choice of contending parties ( groups) to co- exist as a society. The very art of politics is creating commonwealth. Why? The Complexity of technology requires surrender of viewpoints deemed inviolable by too many participating groups in the society. That is, groups find it ever more difficult to compromise their true beliefs between parties of differing true beliefs. The measure of this , to me, is the growth of societal groups that are, first and foremost, defined by what they are against. This is the stuff that leads to civil wars. Civil wars that settle issues more or less permanently give new leases to maintenance of sufficient commonwealth to co exist. Best example, I think: The English Civil War.

    It is patently obvious that our bureaucracy , both corporate and government, is beset by far too many differing views on outcome. Electronic Civilization will require ever greater workable central control to enable electronic high tech civilization to literally survive. At the same time, electronic high tech civilization destroys ever more livelihoods that, at the same time, are required to fund the electronic high tech civilization. The central issue is who owns the high tech means of societal civilization. Right now, it is obvious that the bulk of the civilization is increasingly cut out of sharing required to maintain the electronic high tech commonwealth. The technology cuts the incomes of the very people the technolgy needs revenues from to survive. Compare life in the US in 1910 to 2010. Yet, our political system is geared to 1910 far, far more than 2010.

    As I see it, present mass beliefs in the US, what is deemed right and proper and good politically,even if a commonwealth of views could be created, cannot support the present complexities of electronic high tech civilization. In my view, the US is suffering the same ills as the Chaco Canyon Anasazi did when their very successful society collapsed and began to fade away. Jared Diamond covers this story very well along with a number of other success and failure socities.

    To fix our problem, the US citizen must abandon a great many very beloved ideas and choose concepts leading to commonwealth. These can only be forced by difficult circumstances. The drunks must pass out cold and see the abyss before they will change their beliefs. In other words, choose by adapting present society to technology or move back to a society that is capable of maintaining reasonable commonwealth with lesser complexity of technology. The present society has run out of steam.

    Comment by Jerry J — June 30, 2010 @ 5:41 PM | Reply

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