Democrats Are Teaming With Republicans for a Stealth Attack on Wall Street Reform

[jclay]

That's the title of the article, here: http://readersupportednews.org/news-...-street-reform

The general thesis is that an obscure congressional bill, S.2155, originally intended to provide reasonable (allegedly) regulatory relief for small, local banks, is being hijacked by the largest banks in ways that will allow (encourage actually) a return to excessively risky activity, thereby paving the way for another financial disaster. I haven't finished reading it but so far the thesis seems sound.

The sub-plot, and big surprise here (I'm joking), is that a bunch of the Democrats supporting the bill are more interested in appearing to be working in a bi-partisan fashion than they are at safeguarding the economic stability of our banking (lending + investing), and therefore entire economic, system. Although I'm not familiar with the Democrats in question that sort of behavior is nothing new and it turns out that they're largely in states Trump won. One can see an obvious rationale.

Metaphorically the author saying "it's a duck". What I'm seeing, so far, quacks, has webbed feet and kinda looks like a duck.

You might want to read it.

[ericpmoss]

It's serious as a heart attack. With this bill, we are guaranteed another meltdown. Banks up to $250B will no longer have to keep a minimum amount of actual funds on hand (healthy banks have maybe a 10-to-1 leverage -- money invested vs money on hand), and will no longer have to have a plan in place in case of financial crisis. They'll be free to gamble it all, just like before that mongrel of a law called Dodd-Frank.

But wait, there's more! The Supreme Court is about to rule in the Janus case. With one ruling, likely to go the way of big business, they will be able to destroy all public sector unions, and then proceed to dismantle the New Deal.

Of course, the headlines were about Trump and another hooker.

[jclay]

It's serious as a heart attack.
Of course, the headlines were about Trump and another hooker.

Yup. Folks would rather get hot under the collar about ideological wedge issues or watch The Bachelor then get off their butts, read up on the issue and make some calls/write some letters.

I don't like it but I guess we really do get the government we deserve, and it's results....we being in the collective sense.

It's rather depressing.

[j44ke]

The admittedly limited reading I’ve done (I tend to be distracted by bike racing and have no idea what the bachelor reference is about) seems to indicate that the Dodd-Frank that was planned was not the Dodd-Frank that was approved, and that some of the changes to the bill ended up penalizing smaller regional banks and rewarded larger national banks, resulting in a decrease in services for people in smaller localities and increase in monopolies where a national bank controlled banking services in areas in which it had no local interest and other issues. It seems like one of those situations where Congress intended to make a fork and ended up with a serrated spoon. And now they’ve realized they might actually need that spoon but will probably end up making a butter knife. You could also view Republicans and Democrats working together as a positive, because that’s what they are fricking supposed to do. But in the end this is just one more clusterf#%k our current goverment is going to produce and one more reason that getting rid of everyone and accepting no arguments of sacred cows is probably a good idea.

[joosttx]

Hmmmm I thought this was about Cohen joining the Trump team to make sure carried interest wasnt taxed

[j44ke]

Hmmmm I thought this was about Cohen joining the Trump team to make sure carried interest wasnt taxed

Mmmmmm carried interest...

[joosttx]

exactly

[theflashunc]

I hate to be the one running around screaming the sky isn't falling on this, but the bill doesn't do away with any and all regulation, mandatory capital thresholds, and other details for banks below $250 bln in assets. It removes them as mandatory requirements that Dodd-Frank set at $50 bln. Which, I hate to break it to anyone not terribly familiar with our financial system, but regional banks with $200-ish bln and below in assets were not at the heart of the crisis, nor should they be regulated in the same way as a $2 trillion global enterprise like JPMorgan. And for systemtically important institutions below the $250 bln threshold, it still gives the Fed leeway to require the same living wills, annual stress testing and other oversight that was a key part of Dodd-Frank.

Should regional banks have a real regulatory and enforcement oversight regime monitoring their work? Totally. But holding them to the same standards as a $2 trillion behemoth like JPMorgan belies any perspective on the industry, how it works, and what caused the last crisis.

[guido]

Given how many Fed governors Trump is going to get to appoint, that is not a backstop i have a lot of confidence in anymore...

There is little or no shortage of new banks, and the industry is making a ton of money. I've got a really tiny violin for the poor oppressed bankers.

Best government money can by...

[Christian Fox]

Oh Lord. The SLR is non-risk weighted capital ratio that treats a 3 month T-Bill the same as a junk bond. The only thing banks are pushing for is for treasuries and excess reserves to be exempted from the ratio. That's it. Lumping treasuries in with every other risky asset has only accomplished two things: drastically reduced liquidity in the world's most important market (US Treasuries and treasury repo), and higher interest rates in the long end which cost tax payers and liability managers billions. Trust me when I say that an active, liquid treasury market drastically reduces systemic market risk. Anyone who doesn't understand that has no business even trying to form an opinion on the topic.

Alas, any change to SLR will be minimal, likely some small % relief for treasuries and or reserves.

[j44ke]

I hate to be the one running around screaming the sky isn't falling on this, but the bill doesn't do away with any and all regulation, mandatory capital thresholds, and other details for banks below $250 bln in assets. It removes them as mandatory requirements that Dodd-Frank set at $50 bln. Which, I hate to break it to anyone not terribly familiar with our financial system, but regional banks with $200-ish bln and below in assets were not at the heart of the crisis, nor should they be regulated in the same way as a $2 trillion global enterprise like JPMorgan. And for systemtically important institutions below the $250 bln threshold, it still gives the Fed leeway to require the same living wills, annual stress testing and other oversight that was a key part of Dodd-Frank.

Should regional banks have a real regulatory and enforcement oversight regime monitoring their work? Totally. But holding them to the same standards as a $2 trillion behemoth like JPMorgan belies any perspective on the industry, how it works, and what caused the last crisis.

And again, how I understand it, these local/regional banks are an integral part of local/regional farming and related businesses. Big boxes, corporate farming, chain supermarkets - their finances are part of corporate financial plans somewhere else. But the private farms depend on local banks to manage the ebb and flow of the seasons. And the Democrats supporting this bill are in areas where farming is a central business. Some are also up for re-election, and these Democrats don't feel like they are shielded well enough by the Party on issues that impact farming so they may go it alone on this bill.

The only problem I see is that a number of articles suggest the bill doesn't clearly differentiate between actual locally-owned smaller banks and smaller banks that are subsidiaries of larger national banks, i.e. the bill is not specific enough to help just the institutions Democrats say need protecting. I guess the worry is that potentially larger national banks could use their deregulated subsidiaries as a loophole to tip toe around some of the Dodd Frank protections, thereby increasing the reach of any future economic disasters.

So that's what I mean about spoon>fork>butter knife.

[j44ke]

Oh Lord. The SLR is non-risk weighted capital ratio that treats a 3 month T-Bill the same as a junk bond. The only thing banks are pushing for is for treasuries and excess reserves to be exempted from the ratio. That's it. Lumping treasuries in with every other risky asset has only accomplished two things: drastically reduced liquidity in the world's most important market (US Treasuries and treasury repo), and higher interest rates in the long end which cost tax payers and liability managers billions. Trust me when I say that an active, liquid treasury market drastically reduces systemic market risk. Anyone who doesn't understand that has no business even trying to form an opinion on the topic.

Alas, any change to SLR will be minimal, likely some small % relief for treasuries and or reserves.

Hey man, we're doing our best. You obviously have more experience in financial markets. Great. Explain what you know without disparaging people.

[bigbill]

Hey man, we're doing our best. You obviously have more experience in financial markets. Great. Explain what you know without disparaging people.

I liked his approach, the OP was a link to a pretty far left generated article that spun the information to create headlines and make people think the sky is falling. If we're going to have an OT section that will have linked articles like that, then I think a "no it's not" reply is appropriate.

[Christian Fox]

Hey man, we're doing our best. You obviously have more experience in financial markets. Great. Explain what you know without disparaging people.

Sorry, I came across as a dick. The SLR had the intention of reducing bank leverage, which clearly needed to be done after the financial crisis. But SLR is a very blunt tool in that it effectively charges a huge cost to a bank balance sheet for assets that are essentially risk-free (treasuries, repo, and excess reserves). It limits banks ability to trade, make markets, and provide financing for the treasury market. What this has done is distort the treasury market. Right now 30yr bank credit has a lower interest rate than 30yr US Treasuries, simply because the cost of holding a treasury bond on a bank's book is too high. That doesn't make a whole lot of sense. Higher treasury yields mean higher borrowing costs for tax payers. And, more importantly, a very liquid treasury market is important (on a global scale) in times of financial crisis. If in a time of panic, a flight of capital to the US treasury market finds fewer buyers, that panic becomes a spiral.

Again, I apologize for sounding like a condescending dick. I'm not all that smart, but this stuff is my day job. Tweaking the SLR is many light years away from going back to pre-2008 regs.

[j44ke]

So the way the SLR is calculated effectively limits bank investments in addition to what the Volcker rule limits? Or rather, the Volcker Rule limits the risk level of bank investments, and then the SLR calculation increases the cost of those investments by ignoring relative levels of risk?

With the exemption of banks under $10billion in assets from the Volcker Rule, would major banks be tempted to use subsidiary banks for riskier investments? Is there a way that larger banks ($250billing & <) that were still subject to all the financial regulations of Dodd Frank and Volcker might use subsidiaries to increase profits through riskier investment strategies and thereby compensate for the more expensive & more conservative investment strategies enforced by the regulations? Not sure if that question makes sense or even abides by accounting rules, but I am assuming that if there are subsidiaries, there is a parent company with investors who benefit from accumulated profits, etc.

Basically I am wondering if there is a way that this bill might increase the attractiveness of smaller banks to larger banks, and that this bill, which at least professes to help smaller banks, might actually increase the chances that larger banks would go around buying them up because of their relatively deregulated positions.

[j44ke]

I liked his approach, the OP was a link to a pretty far left generated article that spun the information to create headlines and make people think the sky is falling. If we're going to have an OT section that will have linked articles like that, then I think a "no it's not" reply is appropriate.

Fair enough. I get that.

Sorry, I came across as a dick. The SLR had the intention of reducing bank leverage, which clearly needed to be done after the financial crisis. But SLR is a very blunt tool in that it effectively charges a huge cost to a bank balance sheet for assets that are essentially risk-free (treasuries, repo, and excess reserves). It limits banks ability to trade, make markets, and provide financing for the treasury market. What this has done is distort the treasury market. Right now 30yr bank credit has a lower interest rate than 30yr US Treasuries, simply because the cost of holding a treasury bond on a bank's book is too high. That doesn't make a whole lot of sense. Higher treasury yields mean higher borrowing costs for tax payers. And, more importantly, a very liquid treasury market is important (on a global scale) in times of financial crisis. If in a time of panic, a flight of capital to the US treasury market finds fewer buyers, that panic becomes a spiral.

Again, I apologize for sounding like a condescending dick. I'm not all that smart, but this stuff is my day job. Tweaking the SLR is many light years away from going back to pre-2008 regs.

And I may have misunderstood the direction of your reaction. Thanks for replying.

[theflashunc]

And again, how I understand it, these local/regional banks are an integral part of local/regional farming and related businesses. Big boxes, corporate farming, chain supermarkets - their finances are part of corporate financial plans somewhere else. But the private farms depend on local banks to manage the ebb and flow of the seasons. And the Democrats supporting this bill are in areas where farming is a central business. Some are also up for re-election, and these Democrats don't feel like they are shielded well enough by the Party on issues that impact farming so they may go it alone on this bill.

The only problem I see is that a number of articles suggest the bill doesn't clearly differentiate between actual locally-owned smaller banks and smaller banks that are subsidiaries of larger national banks, i.e. the bill is not specific enough to help just the institutions Democrats say need protecting. I guess the worry is that potentially larger national banks could use their deregulated subsidiaries as a loophole to tip toe around some of the Dodd Frank protections, thereby increasing the reach of any future economic disasters.

So that's what I mean about spoon>fork>butter knife.

A completely justifiable concern, but holding companies parents for smaller banks are judged as part of their exams and oversight on their ability to weather and absorb any losses from their subsidiaries. They have to ensure the parent has enough capital to weather any hits the subs might take. Otherwise, you're creating a system that would incentivize banks to shuffle all their bad assets into a separately chartered sub, spin it off and let it fail while the remainder of the operations keep humming along. Its why Bank of America couldn't spin off its disastrous Countrywide deal into its own subsidiary, and just try to parcel it out for pennies on the dollar.

So while I get it, the functional, day-to-day concern is overblown for the threshold question. It's still being regulated at the holding company level, whether or not you make the much smaller sub adhere to the same annual reviews and stress testing. All that is still happening, for all those assets and operations, at the holding company level.

[ericpmoss]

Frank (of Dodd-Frank) on the bill:

Barney Frank on why he'd vote 'no' on the bill

His current employer benefits from the bill as-is, but he still opposes it. There's more to it than just the asset threshold being too high.

[j44ke]

Good to get the perspective. So he admits that he sees now that Dodd Frank put Democrats in what he calls "marginal seats" in jeopardy by creating a legitimate complaint from community banks. I find particularly interesting his view that allowing this relatively limited (in scope) error to go uncorrected in 2013 strengthened the argument for anti-regulatory members of the Republican Party against the entire Dodd Frank bill, rather than just the limits on community banks. So as a result, he feels the following elements represent unacceptable over-reach.

Specifically, they [Republicans] insisted on raising the FSOC level to $250 billion, a level twice as high as is prudent. As I have noted before, the failure of two or three such institutions would put us in Lehman Brothers territory. They then exacerbated that problem by putting in place rules that will make it excessively difficult for any future regulators to invoke what has from the outset been an important Democratic argument—namely that there be a right for the FSOC to take jurisdiction over banks between $100 and $250 billion if that bank's activity threatened stability.

The Republicans also added a provision allowing foreign megabanks—Deutshce [sic.] Bank and HSBC for example—to evade regulation appropriate for banks of their size by putting their American assets in a separate, holding company. Finally, the package continues to include a provision, weakening the law against racial-discrimination in housing, by raising from 50 to 500 the number of loans a bank may make before reporting on this issue.

So Countrywide was worth $200billion when it went under? That means under this current bill, it would not have been scrutinized directly by the FSOC, but BofA would have needed to prove to the FSOC that it could withstand a default by Countrywide?

The option to separate US holdings by foreign banks in to separate holding companies sounds weird. What would be the regulatory relationship between Deutsche Bank and those holding companies and their subsidiaries?

[ides1056]

no Christian, you sounded like you deal with this on a daily basis

what could go wrong, and when is what I'd like the crystal ball to tell me