Friday, June 25, 2010

Financial Bill Likely to Pass Hurting Banks and Wall Street

Tags: Finance Regulation Bill Stronger than Expected Lincoln Swaps Seize Banks, Volker Rule, Risky Derivatives Including Food Energy Metals Affiliates States Stronger Regulation Power

Victoria McGrane of the WSJ had a well written summary of the Campaign Finance Bill which involved compromise, but still came out much stronger than I had hoped. The third Republican vote for the Bill, Scott Brown (R-MA), is proving to be a Senator that can win a full term for re-election.

Senator Blanche Lincoln (D-AR) retained the major components of her derivatives spin-off provisions! Here is a brief summary of the important provisions in the over 1,600 page bill.

Because most bills are extremely complex, very few people can even partially understand the full implication of bills so we need a reliable and honest reporter to tell us what is important. People on the left and far-right have often advocated or argued against provisions of the bill without really understanding what it really was or its implications.

Remember that I warned you months ago that since about 62% of our GDP is the financial sector in our slow economy, we must be very careful what bills we pass to regulate the financial industry. But the full implications of the bill can only be recognized after it comes into effect over the next year or two.

1. Regulatory authorities (FDIC) can now seize troubled large banks and then sell them off without a taxpayer bailout. A fund paid by the banks would be accumulated over time to provide money to do this.

2. A Financial Stability Council will continuously monitor our total financial system to try to determine systemic risks to our financial system and in extreme cases can seize banks.

3. Volker Rule: A maximum of 3% investment of Tier 1 capital would be allowed and the Hedge Funds would not be bailed out by the bank.

4. Extend comprehensive regulations of derivatives including the trading of derivatives and companies that are selling them. Customized Swaps could still be used but are required to report what they are doing to the Central regulators so the overall trading of Swaps could be monitored.

5. Banks would have to spin-off their riskiest derivatives in trading operations to affiliates, a less draconian modification of the Senator Lincoln's bill provision. Banks would be able to retain currency swaps, foreign exchange swaps, and gold and silver swaps.

Including those that will be in affiliates would be trading in agricultural commodities which led to the incredibly high price of Red Wheat that goes mainly into bread. Thankfully, energy and most metals will also have to be spun off. Sob sob to Goldman Sachs.

As I said before, the high price of oil resulted from speculators as happened with the high price of bread in 2008. The price is now between $70-$80 dollars. Mentioned by Rachel Maddow last night (Need to copy this link to use). She also pointed out as I alluded to in previous blogs that only a relatively few exploratory wells (33) were shut down and none of the production wells were shut down. (3,000). In order to make Obama look bad the corporate press/media including the New York Times have not emphasized this point which I am sure they knew. The editors take out stuff that helps Obama.

The Consumer Watch Dog provision has more teeth than I expected. Except for the auto loan provision, credit cards, all Mortgages, all banks and credit unions over $10 billion, payday lenders who prey on the poor, check cashers, and certain other non-financial firms.

6. Allows states to have laws that are more restricted than this financial legislation. As long as we keep the Republicans out of power, the provision to allow certain National Banks to operate differently if he Federal law prevents them from doing "business." State attorneys can enforce rules if these national banks try to go back to their old habits of bilking customers.

7. Our country is run by the money corporations with the help of the Federal Reserve. So every two years they have to reveal how much money they provided and to whom. Hope this helps. There will be a one time audit of where the Federal Reserve "loan" at zero interest went and how much in this emergency.

8. Would try to make Credit Rating Agencies less subject to conflicts of interest as we saw which led to this financial crash. Again we know that Reagan and the Bush's ignored regulations by not enforcing them.

9. Wall Street tends to sell customers stocks they want to get rid up after huge profits. The technology stocks are an especially egregious example as were the CDOs on mortgages sold by Wall Street Banks. Caution, they are still selling stocks or recommending them after a great run up. The smart and connected guys sell stocks with large profits gradually to the naive public or hype sectors after they have gone up sharply. More rules to reduce this, I hope.

10. Some of the secrecy of Hedge funds operations will become more transparent.

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