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What are good reforms in the House finreg bill that aren't in the Senate?

By Mike Konczal

Opinion is still mixing about the status of the financial reform bill. Some are calling it revolutionary, some are saying it’s a disappointment and a missed opportunity.

Here's my take: It's a perfectly reasonable first response to the crisis we went through, and it should have been passed in exchange for TARP. In an ideal world, we as a people could have said: "Yes we will loan you $800,000,000,000 and untold amounts more through the Federal Reserve. But in exchange for this loan, we need a legal mechanism to FDIC you guys, to undo the derivatives deregulation of the 1990s and update the derivatives regime for the 21st century, consolidate consumer protection and expand it to include the shadow banking lending networks, and if you are a shadow bank please act like you are a regular bank when it comes to capital." Sadly that wasn't ready to move as an attachment to that short document that Federal Reserve provided in the 2008 panic.

But in terms of that exchange, the Senate bill gets us a good part of the way there. There's still a lot to do, and we'll lay out a bit of a possible agenda for both the United States and the
international community this week. But first is that this bill isn't done yet! I am not sure what will happen in conference committee yet, and you aren't either.

There are some things that are stronger in the House bill that could be added to the Senate. What are the big things missing compared with the House?

Miller-Moore Amendment: This excellent amendment allowed secured creditors of a firm that is being taken down through resolution authority to take a haircut after the unsecured creditors are wiped out. This gave FDIC some leeway to actually do what will need to be done when it comes to resolving a firm without having to go hat-in-hand to Congress again. It will also make creditors more worried about investing in a systemically risky firm; a worry might be that the market sees perpetual bailouts for the largest players and gives them credit cheaper, just like they did with the GSEs.

Pre-funding Resolution: We don’t have a sense for how this resolution authority will work in the middle of a crisis. It might go smoothly, or it might not. But either way, adding the costs to the remaining firms will further depress their balance sheets in the middle of a downturn, further increasing the chances that it will cascade. It might not be a problem, but it might be.

It’s not fair for a firm to get insurance without having to pay for it in some way, so the idea that only the remaining firms would have to contribute into this fund is a bad one. But the idea that those that pay wouldn’t pay in the up-cycle, which would be counter-cyclical and better from a regulatory point-of-view, but instead have to add the liability to their balance sheet in the down-cycle, is the wrong way to do it. And as such, it wouldn’t surprise me if Congress wanted to pass an emergency bill picking up the tab.

Lynch Amendment Michael Hirsh reminds us that the Lynch amendment didn't make it into the Senate, though it was in the House. We discussed this while it was in the House here. This is an amendment that will help limit ownership of the derivative clearinghouses, the heart of derivatives reform, from any specific firm. This will help prevent reform from being dismantled at the clearinghouse level by those who would prefer to keep the market in the dark.

15:1 Leverage Requirement We talked about the lack of a strong 15:1 leverage requirement in the Senate here. It is in the House, however. And it should be extended to the final bill, as it would provide a hard fencing around the discretion that regulators can bring to the table. The Collins Amendment that the Senate has would be an excellent compliment to this.

There was a 16.67:1 leverage requirement as part of the SAFE Banking Act, which failed to pass. Sadly any attempt to get a 15:1 amendment by itself failed. However the House does have this.

These are the four big things that could move from the House to the Senate that would definitely strengthen the financial reform bill.

-- Mike Konczal is a fellow at the Roosevelt Institute. He blogs about finance, economics and other topics at Rortybomb and New Deal 2.0, and you can follow him on twitter.

By Washington Post Editors  |  May 24, 2010; 12:16 PM ET
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I guess you think we are heading in the right direction. Problem is will they still bail out the large institutions? Seems that there is "wiggle" room to make changes in the future, without actually having to vote on a new bill again?

Posted by: fzatorski | May 24, 2010 12:49 PM | Report abuse

These comments sound like some of the sort of my young, earnest, bright, but really naiive and inexperienced graduate students. They reveal a lack of knowledge of how policy works, and I am not being cynical.

Also, ESSA was a very long and detailed bill - I believe you are confused with Paulson's 3 pager (not the Fed's).

None of this is to dismiss many of your substantive points. Many are good. But the notion that they could be easily negotiated for TARP investments somehow in a few weeks is absurd.

Posted by: idw3 | May 24, 2010 9:32 PM | Report abuse

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