Wall Street Reform Is in

It seems the entire world is angry at Wall Street, which, among other things, helped the U.S. Senate push through the all-encompassing legislation to curb its periodic insanities and prevent future financial meltdowns. I wrote about it recently; how big it is, literally and metaphorically, and how it has still left me lukewarm about its future prospects.

But I have to admit it is one resilient piece of legislation. It has been fought fiercely every step of the way. The banking industry hated it, because it proposes to limit the kind of products that banks can sell. It is creating a new regulatory body serving consumers, the purpose of which is to impede mortgage and credit card abuses. It is designed to put in place mechanisms through which large institutions can fail in an orderly fashion. It is setting up a system to shut down banks that are engaging in too risky and too complex financial derivatives.

I have to admit another thing: if the Senate was ever good at timing things, passing the Wall Street reform bill was definitely it. The world is angry and fearful again. Crisis mode has returned to equity markets, spurred on by unrelenting concerns about sovereign debt
loads in Europe and in other corners of the world, most of which have been accumulated as the countries tried to flush out the recession with excess money supply.

Resilient, yes, but not out of the woods yet. The bill must now be reconciled with numerous other financial regulations in the House of Representatives. If the momentum loses steam, many of the radical measures currently incorporated in the bill could end up watered down, or even ditched in the next few weeks.

That did not stop President Obama from putting his stamp of approval on the bill, when he said, “The recession we’re emerging from was primarily caused by a lack of responsibility and accountability from Wall Street to Washington. That’s why I made passage of Wall Street reform one of my top priorities as president, so that a crisis like this does not happen ever again.”

The Democrats vowed to protect, as President Obama put it, “the larger economy and the American people from the kind of upheavals that we have seen.” Some Republicans warned that the bill would vanquish many jobs on Wall Street and among small businesses. As
Republican Senator Richard Shelby said, as he voted against the bill, “The decisions we’ve made will have impact on the lives of Americans for decades to come. Judgment will not be rendered by self-congratulatory press releases, but rather by the marketplace.
And the marketplace does not give credit for good intentions.”

Some legislators also worry that the ship on reforming the U.S. financial system has sailed and all that this new bill will accomplish is to drive the capital out of the country at the expense of scoring a few political brownie points.

In my humble opinion, I don’t think any ship has sailed, and certainly not the one bringing the much-needed reformation of Wall Street. I don’t think that putting safety mechanisms and circuit breakers into our financial systems is going to drive capital away. Such an old way of thinking simply does not work anymore. What concerns me more is whether it is going to be enough to prevent abuses and conflicts of interest running amok, like Goldman Sachs saying one thing to its clients and doing quite another behind their backs. Or, Wall Street growing its tentacles as far as Europe and helping confused governments structure credit default swaps that are now proving to be their ruin.

We will see what the next few weeks bring, as Wall Street reform bill gets vetted at the House of Representatives. I hope that it will not lose its bite. In its current form, it is still soft enough for fraudsters to find new loopholes.