|By GRETCHEN MORGENSON|
The attack began with a bill that narrowly failed in a fast-track vote on Wednesday in the
The bill, introduced by Representative
Of course, you wouldn’t know any of this from the name of the bill: the Promoting Job Creation and Reducing Small Business Burdens Act. Or from the mild claim that the bill was intended only “to make technical corrections” to the Dodd-Frank legislation of 2010.
Here’s the game plan for lawmakers eager to relax the nation’s already accommodating financial regulations: First, seize on complex and esoteric financial activities that few understand. Then, make supposedly minor tweaks to their governing regulations that actually wind up gutting them.
“We’re going to see repeated attempts to go in with seemingly technical changes that intimidate regulators and keep them from putting teeth in regulations,” predicted
The bill was put forward on the second day of the new
A central element of the bill chipped away at part of the Volcker Rule, the regulation intended to reduce speculative trading activities among federally insured banks. The bill would give the institutions holding collateralized loan obligations — bundles of debt — two additional years to sell those stakes.
The sales were required under the Volcker Rule, which bars banks from ownership in or relationships with hedge funds or private equity firms, many of which issue and oversee these instruments. Like the mortgage pools that wreaked such havoc with
The creation of such securities has been torrid recently;
Given the size of these positions, it’s not surprising the institutions want more time to jettison them. But the new legislation represents Wall Street’s second reprieve on these instruments. After banks objected to the sale of their holdings last spring, the Federal Reserve gave them two years beyond the initial 2015 deadline to get rid of them.
Now they want another two years.
Although the top three banks had unrealized gains in their C.L.O. holdings in the third quarter, SNL said some banks were facing losses. And that was before the collapse in the price of oil, which has undoubtedly pummeled some of these securities.
A second deregulatory aspect in the Fitzpatrick bill relates to the lucrative private equity industry, which remains loosely regulated. The bill would exempt some private equity firms from registering as brokerage firms with the S.E.C. Under securities law, such registration is required of firms that receive fees for investment banking activities, like providing merger advice or selling debt securities.
Private equity firms are typically registered only as investment advisers, so submitting to broker-dealer regulation would result in more frequent examinations and more rules.
These firms don’t like that. But their investors could benefit from closer regulatory scrutiny of costly conflicts of interest in these operations. For example, a private equity firm providing merger advice to a company its investors own in a fund portfolio — not an arm’s-length transaction — could easily charge more for those services than an unaffiliated firm would.
Finally, the bill’s changes in derivatives would reduce transparency and increase risks in this arena by allowing
Trading on clearinghouses generates accurate price data that help both banks and regulators value these instruments. Because these clearinghouses perform risk management, problematic positions are easier to spot.
If this change goes through, it will be the second recent victory on derivatives for big banks. Last month,
The Dodd-Frank law, as written back in 2010, was by no means a comprehensive fix for a risky banking system. And it is more vulnerable to attack, in part, because of its complexity and design. Dodd-Frank delegated so much rule-making to regulators that it essentially invited the institutions they oversee to fight them every inch of the way.
Still, it is remarkable to watch the same financial institutions that almost wrecked our nation’s economy work to heighten risks in the system.
“The truth about Dodd-Frank is it’s pretty moderate and pretty compromised already,”
Which is exactly what
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