Financial Reform Summary
It looks like the senate and house have finished their conferencing so we can look at what changes will likely be coming down. Here are the highlights that I noticed. The bill is huge. So I’m sure we will be discovering lots of little gotchas for quite some time.
$250K FDIC made permanent — Improved. Only downside, is this level of coverage is not funded so it will come out of tax payer revenue rather than bank fees.
Fiduciary duty for brokers — Compromise. The bill orders the SEC to spend 6 months studying the issue, but also gives the SEC the authority to impose a fiduciary duty if they decide it is warranted. Let’s cross our fingers and hope they apply a uniform fiduciary standard for all financial advice providers.
$100mil AUM for SEC oversight — Neutral. Investment advisors with less than $100 million AUM will be pushed to state oversight.
Mortgage Underwriting Standards — Improved. While this feels a bit like closing the barn door after the horses have left, it is still welcome. No more no doc (i.e., liar loans). Lenders must verify income, credit history and job status. Bans payments to brokers for steering borrowers to high-priced loans
Derivatives — Improved. Moves most derivatives to exchanges. Customized swaps remain over the counter, but have reporting requirements. New capital, margin, reporting, record-keeping and business conduct rules for firms that deal in derivatives. This doesn’t eliminate the risk of derivatives, but should make it more visible. The derivative exchanges also becomes a new potential too big to fail entity.
Too Big To Fail — Not solved. On the plus side a new resolution authority will be created (with ability to take over large banks) and funded by a $19 billion dollar tax on banks that have more than $50 billion in assets. Unfortunately, it looks like the banks will circumvent this by making themselves bigger, more global and more complicated so that the resolution authority will be to afraid to take over a bank (in the way the FDIC does), but instead will end up just pouring money into a failing bank (like we did with AIG). It also doesn’t address the repeal of Glass Steagall or leverage issues.
Credit Rating Agencies — Not solved. Retains the current rating agency structure and limited players. In other words, security creators can still go rating shopping. The only counter balance that was added was the ability for investors to sue the ratings agency.
Limits on Proprietary Trading — Compromise. Puts in 3% limit on proprietary trading and stake in hedge funds they control. This helps limit the systematic risk a bank can expose itself to and helps reduce some of the moral hazard since banks can count on being bailed out if they bet wrong. However, most banks were already under these limits so it will not be a big change.
Federal Preemption of State Banking Laws — Compromise. Overturns the law which made Federal preemption the standard, but allows national banks to ask for a waiver from state tougher laws (which they will likely receive). So large national banks will still likely be exempt from tougher state laws but smaller regional banks will not be.
Consumer Financial Protection Bureau — Compromise. It might eventually write some rules that help. It exempts auto loans from oversight by this body.
Missing — No forcing of mark to market. Doesn’t moderate pay (i.e., no clawback provisions)
- Fiduciary Study — http://investmentadvisor.com/Issues/2010/June-2010/PublishingImages/DOC062410.pdf
- Proprietary Trading — http://www.theatlantic.com/business/archive/2010/06/dodd-frank-bills-volcker-rule-a-win-for-big-banks/58747/
- Agencies Created — http://www.investmentadvisor.com/News/2010/6/Pages/Conferees-Agree-to-Final-Financial-Services-Reform-Bill.aspx
- Grading Reform — http://www.ritholtz.com/blog/2010/06/grading-financial-regulatory-reform/