Well it has been more than two years since the financial disaster has hit the nation and the taxpayers have had to bail out banks, car companies, insurance companies, and even the largest Wall Street financial firms. It is important to remember that the economy fell apart because of Wall Streets reckless behavior. This reckless behavior was blessed by the United States government over the past decade with various regulations and laws that were either relaxed, or eliminated. Most notably were the repeal of the Glass-Steagall act in 1999 and the effective removal of leverage limits for Wall Street financial institutions in 2004.

The Obama administration would like you to believe that all of the problems currently being experienced in the economy are the direct result of Wall Street and nobody else. It is true that Wall Street created the disaster, but it is the government who gave them the tools to do it with .

So after two years since the financial crisis has decimated the United States economy all the talk has been on financial reform. We have all heard of the term too big to fail which are simply institutions that have grown to the point where there mere existence is critical to the same economy they wrecked havoc with to begin with. These too big to fail firms have not only grown larger and more complex as a result of all of the taxpayer-funded bailouts, but they have become even more dangerous as a result of the arm-twisting that Congress gave the Financial Accounting Standards Board (FASB) to change mark to market accounting rules. Under the current guidelines of the FASB we no longer know the real health of any financial institution or bank simply because assets held on the books are marked to a mythical value.

Congress has spent well over the past year putting together a financial reform bill. It has gone from the House to the Senate, the Senate to the House, and back and forth over and over again to come up with a bill that is supposed to reign in Wall Street, and take away the very tools that enabled them to destroy the economy to begin with. So does the final compromise bill address any of the real problems? Will we prevent a financial crisis of the likes we have just lived through from ever happening again? And will it restore confidence in the very same financial system that destroyed the livelihood of millions of Americans?

The financial reform bill has some good points, bad points, and a lot of stuff that simply falls into a category of WTF.

WTF Category

Im going to begin with the WTF stuff first simply because the sole purpose of the financial reform bill was to set new laws, limits, regulations, and guidelines for Wall Street firms and all other financial institutions. But instead the financial reform bill essentially mandates new councils to be established and new studies to be performed. A big part of the financial reform bill is the creation of what is now going to be called the Financial Stability Oversight Council (FSOC). Thats right, another government agency whose mission will be to study and evaluate certain financial regulations and make recommendations.

For example, in section 115 of the financial reform bill it states the following

in order to prevent or mitigate risk to the financial stability of the United States that could arise from the material financial distress, failure, or ongoing activities of large, interconnected financial institutions, the Council may make recommendations to the board of governors concerning the establishment and refinement of prudential standards and reporting and disclosure requirements applicable to non-bank financial companies supervised by the board of governors and large, interconnected bank holding companies.

So let me get this straight, Congress spent well over the past year hammering out a financial reform bill that really doesnt do anything at all except establish another government agency that will spend more time and money on how to fix the problem. In this regard I call this a WTF. What are some of the things that the Council is to evaluate and study? Here is the list as outlined in the financial reform bill:

• Risk based capital requirements

• Leverage limits

• Liquidity requirements

• Resolution plan and credit exposure reporting requirements

• Concentration limits

• Contingent capital requirements

• Enhanced public disclosures

• Short term debt limits

• Overall risk management requirements

Thats a lot of stuff for the new Council to work on. But where it gets even better, the financial reform bill says that the Council must submit a report to Congress regarding the study no later than two years after the financial reform bill becomes law. Talk about kicking the can down the road, this essentially kicks the can into the next administration.

And when it comes to too big to fail the financial reform bill does nothing more than pass the buck. In section 123 of the financial reform bill it states that a study is required. Beginning on line number eight of section 123 it states

the chairman of the Council shall carry out a study of the economic impact of possible financial services regulatory limitations intended to reduce systemic risk. Such study shall estimate the benefits and cost on the efficiency of capital markets, on the financial sector, and on national economic growth.

So where does the financial reform bill address the too big to fail problem? It doesnt, it lets the new Council study it. In total it appears there are more than 22 studies that the financial reform bill will require. Ill say it again, it has been more than two years since the financial crisis began and this financial reform bill should contain actual hard numbers that go into effect upon the presidents signing of the bill. Instead all we really get is a lot a tough talk from Washington but it has no teeth, the financial reform bill is an embarrassment to the United States for it promises a great deal but accomplishes little.

One more thing to add to that WTF category here is that under the consumer protection part of this bill which is to safeguard consumers from being taken advantage of by lending companies it excludes automobile dealerships. Purchasing a car is usually the second largest purchase a person or family makes in their lifetime, and the exclusion of car dealers from consumer protection enhancements is simply ridiculous.

What’s good?

The best part is that the Volker rule has been included. This measure bars banks from trading with their own money, a practice that is known on Wall Street as proprietary trading. The provision also would ban firms from betting against securities they sell to their clients. The financial reform bill gives firms up to two years to scale back their proprietary trading.

The financial reform bill does address derivatives trading, but in my view it leaves too many loopholes that Wall Street firms will eventually find ways around. The bill says that routine derivatives are to be traded on exchanges and routed through clearinghouses. But who is going to determine what is considered routine and what is not a routine derivatives trade? We will have to see how this plays out to determine if the derivatives market really becomes transparent or not.

It gives regulators resolution authority to seize and/or break up troubled financial firms whose collapse might cause widespread financial damage. Well this is somewhat of a gray area because if regulators were doing their jobs in the first place firms would never get into that situation to begin with.

The financial reform bill makes permanent the $250,000 insurance for FDIC insured banks and credit unions which up until now was only temporary.

It establishes new national underwriting standards for home mortgage lenders which for the first time will be required for ALL mortgages to ensure a borrower can repay a home loan by verifying income, credit history, and job status. It also bans payments to mortgage brokers for steering borrowers into higher priced loans. No more no income and no job loans.

The bill also creates a new consumer financial protection Bureau, the bad part though is that it will be under the roof of the Federal Reserve. This new consumer financial protection Bureau will have powers to issue new rules over banks and other financial companies. But remember automobile dealers are exempted!

And finally this bill will require hedge funds and other private equity funds to register with the Securities and Exchange Commission as investment advisers and to provide information on their trades to help regulators monitor systemic risks.

Now for the bad stuff. This section deals with parts of the bill that are bad, but not as bad as WTF .

A new law will require banks that package mortgage loans must now keep 5% of the credit risk on their balance sheets. The thought here is that by mandating that banks keep part of the packaged loans on their balance sheet, even while they sell the majority of it to someone else it will force the banks to act less recklessly. What is bad here is that 5% amounts to very little. If a bank is going to have skin in the game then the requirement should be a minimum of 25%, this way banks will have much more skin in the game and will be more careful about the loans to begin with.

The bill also goes into shareholder rights. It will give shareholders of public corporations a nonbinding vote on executive pay and retirement packages. This is just a joke, the average investor can not stand up to the voting power of large holders of stock in the company such as corporate insiders, hedge funds, mutual funds and the like. This is one of those make the average investor feel good parts of the bill but has no meaningful impact.

Also contained within this financial reform bill is a provision that allows individual states to impose stricter consumer protection laws on national banks, compared with the federal standard. Well this is just stupid. John Doe could live in Missouri and have one set of rules and regulations that govern a large national bank and afford him greater protection than another John Doe who lives in Kentucky which may have less strict protections for the consumer. Consumer protection laws need to be standardized and made applicable nationwide. An American citizen should not be protected more or less simply by the state that they live in.

Another bad part of this bill is the creation of yet another government agency. It will create a new Federal Insurance Office (FIO) that will be contained within the Treasury Department. Its purpose will be to monitor the insurance industry and make recommendations about which companies should be treated as systemically important. Like I said above, after more than two years into this financial crisis there should be much more than just more agencies to do more studies. So in this regard I view the Federal Insurance Office as another waste of money.

In summary, the financial reform bill has lots of big words and big promises which I am sure the Obama administration will attempt to pass off as the greatest bill since the health care reform bill. The bill does not really protect taxpayers from any future Wall Street crises, in many aspects it enshrines the bail out architecture that we have become accustomed to. The financial reform bill currently stands at 2,315 pages. As I have opined many times in the past all of this could have been easily handled, and much cheaper mind you, by simply reinstating the Glass-Steagall act and immediately imposing strict capital requirements and leverage ratios. But we knew that something like that would never happen because it would immediately impact profits of the large Wall Street firms and banks. And you know that Wall Street financial firms have some of the most powerful lobbyist in Washington that has ever been seen.

The financial reform bill is likely to be approved by the House and Senate as it stands currently and President Obama has signaled that he will sign it into law before July 4. But what President Obama will be signing is a bill that is full of compromises, continues to allow the too big to fail firms to remain as they are, and does nothing right now to address the real causes of the financial crisis. Maybe after all the studies are completed there will be some meaningful changes. But, dont hold your breath.

Disclosure: No positions