Felix Salmon

The great news from the Senate

By Felix Salmon
May 21, 2010

It’s almost enough to restore your faith in government. The details have yet to be worked out — and you can be sure that after letting the Senate deliver its own bill on its own terms, Treasury will be deeply involved in the reconciliation process, trying to marginalize any measures it doesn’t like. But the outlines of financial regulatory reform are now clear — the NYT has the best chart, I think — and I have to admit that it’s much, much better than anything I dared hope for even just a few weeks ago.

Amazingly, and wonderfully, the Volcker Rule has made it through the Senate, and will surely not be opposed by the House, which never got an opportunity to vote on it. While Treasury might weaken or abolish Blanche Lincoln’s amendment forcing banks to spin off their swap desks, it now seems very likely that there will be some kind of legislation attempting to reduce the amount of speculation and gambling that goes on at regulated, too-big-to-fail institutions. While that kind of activity didn’t cause the financial crisis, I like the idea of it taking place at hedge funds and other institutions which tend to be less leveraged than banks and more capable of failing without massive systemic side-effects.

Of course, there are always things we’d like to see and which won’t make it into the final bill: the greatly-lamented part of the consumer protection agency which would force banks to offer plain-vanilla financial products is one, and Treasury will ensure that any limits on size or capital or leverage come out of Basel rather than out of Washington. (Me, I’d like to see a couple of basic rules or principles be put into US legislation, which would serve to backstop Basel.)

But as David Herszenhorn says, with this financial regulation bill joining health-care reform in becoming law, the Obama administration has managed to bag a couple of truly enormous elephants in its first 18 months or so in power. Is there any hope, now, that some sort of climate-change legislation might be next?

9 comments so far | RSS Comments RSS

Now THAT is “irrational exuberance!”

Posted by Lilguy | Report as abusive

“I like the idea of it taking place at hedge funds and other institutions which tend to be less leveraged than banks and more capable of failing without massive systemic side-effects.”

Unless there is a LTCM-esque situation.

Posted by david3 | Report as abusive

Just like that, Treasury might weaken or abolish Blanche Lincoln’s amendment, leaving a big meaningless chunk of sham legislation for easily-amused folks to celebrate over. Surely not if they had the best interests of the American People at heart?

Oh well, there’s always gallons of wine blogging to look forward to.

Posted by HBC | Report as abusive

Genuine question here – the NY Times graphic says the Volcker rule would affect deeply affect Goldmann Sachs, but I thought the proprietary trading ban affected only commercial deposit-taking institutions. Am I just a functional financial illiterate?

Posted by strawman | Report as abusive

david, it seems that the prime brokers have learned their lesson from LTCM, no hedge funds have that kind of leverage any more.

strawman, it’s not just commercial deposit-taking institutions, it’s anybody with access to the Fed discount window.

Posted by FelixSalmon | Report as abusive

Thanks for the clarification. That’s the upside of blogging. Less deadweight on the sum total of human intelligence.

Posted by strawman | Report as abusive

For the record, climate change comes after immigration reform, at least in my opinion…

Posted by mckibbinusa | Report as abusive

I think the big win was the removal of the onerous ‘angel investor’ causes that would have had the SEC review every deal during a 120 day hold period and would have upped the requirements to be a qualified investor.

Posted by ChrisMaresca | Report as abusive

Sounds good, but the question remains if this isn’t just a battle plan for the war that has already been fought, and whether it addresses the new big problems that the US financial system is facing now, and will be facing in the near future, problems that revolve around the extreme policies applied by the Administration and the Fed.

Posted by yr2009 | Report as abusive

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