Simon Johnson: New financial reg law will be almost completely useless, but 1 good surprise

[brentspeak]

http://www.bloomberg.com/news/2010-07-09/flawed-financial-bill-contains-huge-surprise-simon-johnson.html

Flawed Financial Bill Contains Huge Surprise: Simon Johnson

On the face of it, financial reform appears to have failed...Yet with regard to the heart of the matter -- the kind of systemic risk that almost caused another Great Depression in late 2008 -- all the high-profile ideas in the Dodd-Frank bill turn out to be damp squibs.

The Volcker Rule -- aiming to limit banks’ use of their capital in risky activities -- was watered down by the administration almost as soon as it was introduced in January and has now been negotiated down to almost nothing. Banks will still be able to take big bets with their own capital, as long as the deals don’t look like traditional proprietary trading.

The Lincoln Amendment, targeting undercapitalized derivative trading and about which there was tremendous emotion in recent months, has been greatly diluted. Undercapitalized derivative positions, broadly defined, were at the heart of the matter in 2007 and 2008. This is the common thread that runs from the failure of funds backed by BNP Paribas SA in the summer of 2007 through the demise of Bear Stearns Cos. in the spring of 2008 and into the cataclysm that American International Group Inc. became a few months later...None of the big financial firms will be affected by this legislative outcome. And Treasury Secretary Timothy Geithner’s approach of “let us raise capital standards” doesn’t seem to have legs. Congress was told to not legislate minimum capital requirements and has duly obliged.

snip

And yet there is one item that is more than a surprise -- in fact, its presence in the final bill is quite stunning. This is what is known as the Kanjorski Amendment, after Congressman Paul Kanjorski, chairman of the House Subcommittee on Capital Markets, part of the House Financial Services Committee.

As Johnson points out, because the legislation is too weak to prevent them, there will be yet another financial crisis and colossal bailout down the road. He's just surprised that the banks missed gutting the Kanjorski Amendment.

[ProSense]

1. Yeah,

huge surprise

Johnson and others cannot admit that the bill includes a lot of good so they find one thing to portray as huge, "radical."

[brentspeak]

2. I would wager that Simon Johnson is a trillion times more credible on this issue than you are

[karynnj]

5. He is likely nowhere near as credible as Brooksley Born, Sheila Blair and Elizabeth Warren

who all praised it.

[brentspeak]

6. Wrong

Neither Born nor Warren have claimed it would end "too big to fail"; they merely have issued general statements of support for the bill. Only Bair, a middle-of-the-road politician, has made the claim that the bill would end 'too big to fail', but she was unable to explain why. And the issue of "too big to fail" is the central issue.

Johnson knows what he's talking about.

[karynnj]

8. I did not claim that it would end Too big to fail,

There is a BIG difference between that and saying it is worthless. Johnson is a reputable economist, whose prescriptions on this are more extreme than that of most economists. Given his point of view, I don't think it likely he would have agreed with any bill that could pass Congress - the change he wants is beyond what could be enacted

There are potential downsides with his solution as well. Regulation is a valid way - used in the past - to deal with oligopolies. This is an attempt to do that. Both Warren and Born seem to say in there statements that this bill will be helpful. I know that is NOT saying that it completely precludes having to bail out a company in the future because it is to big to let it fail.

[impik]

3. Bunch of whiners

[zipplewrath]

4. I fear the help will come too late

It's nice that they have the authority now to effectively disassemble companies that get into serious trouble. However, it seems very unlikely that the authority will be exercised until it is already "too late". In the recent example, it most likely would not have been exercised until the summer of 2008. Even by then they may have been hesitant to do so for fear of precipitating what ultimately happened anyway.

The capital requirements should have been legisilated and they should have been very stringent. The rest of it is just so much kerfluffle.

[depakid]

7. In terms of substance, the bill is a failure- but it will give some the ability to waive their hands

and say look! We did something!