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FinReg finished?

Happily, I've got some dribs and drabs of online access here on the Hill, so I can mention that the conference committee finished work on financial regulation in the wee hours of the morning. No one has the final text yet, and so the summaries are a bit early, but here's one from The Washington Post, here's a breakdown of provisions from the Wall Street Journal, and here's some commentary from Tim Fernholz.

Procedurally, the conference report will still need to be ratified by the House and Senate. It can't be amended, but it can be filibustered. That's why, for instance, Scott Brown got his way on permitting banks to invest up to 3 percent of their capital in private equity and hedge funds.

By Ezra Klein  |  June 25, 2010; 10:28 AM ET
 
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Comments

Any FinReg nerds out there know how much capital a current firm puts into hedge funds/private equity? I'm trying to figure out how well the bill compromise will curtail crazy risk taking (it sets it at 3 percent of the firm's capital), but no news outlet reporting on the bill is giving any sort of context...

Any opinions on the derivatives compromise? I thought it was the "bundling" that made such derivatives risky -- the gluing of high risk to low risk stuff in one package. So, who cares if "Banks ... would have to set up separately capitalized affiliates to trade derivatives in areas lawmakers perceived as riskier, including metals, energy swaps, and agriculture commodities, among other things." ?? The same risky financial product is there, and it can still be traded by banks, right?

Posted by: Chris_ | June 25, 2010 11:01 AM | Report abuse

@Ezra:

"...permitting banks to invest up to 3 percent of their capital in private equity and hedge funds."

How much of a percentage can they invest now?

Posted by: TheBBQChickenMadness | June 25, 2010 12:58 PM | Report abuse

According to the WSJ story in the link provided above (best explanation I've read), many banks invest much more than 3% in private equity and hedge funds. More importantly, it prevents a bank from using capital to bail out a failing fund--the fund's holders (bank's customers) would bear the risk of failure. Wasn't this what caused Bear, Stearns to fail? In addition, it separates most derivatives
trading into a part of the bank that isn't federally insured so that the feds (taxpayers) aren't on the hook.

Anothr interesting provision is that in additon to the $19 billion bank tax, if there were a big liquidation, the other big banks would have to pony up money to fund it. This might aaffect banks' behavior and willingness to buy each other rather than see one liquidated.

Lots of stuff is put off on "the regulators", especially the SEC. It really depends on who is in power, whom they appoint and how much they can resist regulatory capture.

Posted by: Mimikatz | June 25, 2010 1:14 PM | Report abuse

@Mimi

"According to the WSJ story in the link provided above (best explanation I've read), many banks invest much more than 3% in private equity and hedge funds."

Thanks! I am still curious if there's any hard data about a percentage to more directly gauge the difference though - esp. if it included the capital for bailing out a failing fund you mention.

Posted by: TheBBQChickenMadness | June 25, 2010 2:12 PM | Report abuse

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