Reading about how Congress is trying to put more controls on the financial system, reminded me of my kids cooking breakfast. You want to praise them for actually doing something, but unfortunately that something is usually inedible and generally results in a giant mess.
My suspicion is that lawmakers, like my children, are well meaning, but they just don’t understand what they are doing and worse what the ramifications are for what they are doing.
I’m sure they feel that for their “main street” constituents they need to curb Wall Street and evil things like bonuses. They cite people like Andrew Hall from Citi’s Phibro unit who received a $100 million bonus — a number most people can’t fathom. Another number most people can’t fathom is the $1 billion he made for Citi. But it’s hard to justify to the teacher who’s making $40,000, especially in an election year, that bonuses of that size are ok. So lawmakers have to do something.
Unfortunately, it looks like that something may do more harm than good.
One of the most under reported provisions that could cause a great deal of harm is that Trust Preferred Securities will no longer count as Tier 1 capital, which could cause massive fund raising by banks of all sizes. The FDIC, which is currently sitting on about $400 million in TruPS CDOs from failed banks, apparently pushed for this provision.
This was part of the Lincoln ademendment, which would also force banks to carve out their derivative operations — another provision that would cause massive turmoil among larger banks.
The good news is that Senator Bob Corker of Tennessee said in a n interview on CNBC that he believes these provisions will be worked out of the final bill in reconciliation.
However, one provision that seems like it will go sailing through is the five percent risk retention piece for securitization. This is an example of Congress taking a broad brush to some problems. No one is against loan originators having “skin in the game,” but most originators already have skin in the game. Also most asset classes including auto loans and credit cards didn’t come up with ridiculous loan types and retained normal underwriting standards during the housing bubble. This risk retention will only push funding costs to consumers.
Unfortunately, with the House, SEC and FDIC all pushing for risk retention it looks as though that will pass in some form.
It will be a long summer, as the Congress works to reconcile the FinReg bills and regulatory agencies work through the comment period on their proposals, so unfortunately we won’t know how hard it will be to stomach these changes nor how big the resulting mess will be for a while.
