The Old Man and the Street -modified Volcker Rule survives FinReg negotiations ~ the Good, the Bad & the Ugly…

Dems did quite a hatchet job in the wee small hours of the morning. Here are the major provisions, they have left most of the implementation to regulators, (the heretofore Eeeevil Federal Reserve gets the Consumer Protection Agency!) and there is a 5 yr window on most changes


(…)VOLCKER RULE: Would curb propriety trading by the largest financial firms, though banks could make de minimus investments in hedge and private-equity funds. Those investments would be limited to 3% or less of a bank’s Tier 1 capital. Banks would be prohibited from bailing out a fund in which they are invested.

Scott Brown R-MA got this 3% for the mutual funds in MA. I cannot wait to hear the JPMChase conference call on earnings in July to see what Jamie Dimon has to say about this. He thought he had killed the Volcker Rule at least twice. The Tall Man always comes back!

DERIVATIVES: Would for the first time extend comprehensive regulation to the over-the-counter derivatives market, including the trading of the products and the companies that sell them. Would require many routine derivatives to be traded on exchanges and routed through clearinghouses. Customized swaps could still be traded over-the-counter, but they would have to be reported to central repositories so regulators could get a broader picture of what’s going on in the market. Would impose new capital, margin, reporting, record-keeping and business conduct rules on firms that deal in derivatives.

So this is the big exciting deal for Chicago! A whole new trading desk to establish, a clearinghouse. (FD-We hold CME shares). Looking to see what the deal is on Warren Buffet’s Berkshire holdings-does he have to put up capital or what? He lobbied HARD against it via Ben Nelson

DERIVATIVES SPIN-OFF: Would require banks to spin off only their riskiest derivatives trading operations into affiliates, in a late-night compromise struck to scale back a controversial provision championed by Sen. Blanche Lincoln (D., Ark.). Banks would be able to retain operations for interest-rate swaps, foreign-exchange swaps, and gold and silver swaps among others. Firms would be required to push trading in agriculture, uncleared commodities, most metals, and energy swaps to their affiliates.

Okay so JPMChase’s silver position is still in the game, they called in like 15 people to surround Blanche last night pushing her to cave, impressed she got anything to go through on this frankly, the pressure was enormous.

CONSUMER AGENCY: Would create a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses; banks and credit unions with assets of more than $10 billion in assets; pay day lenders, check cashers and certain other non-bank financial firms. Auto dealers won a hard-fought exemption from the Bureau’s reach.

Yes Auto Dealers are exempt. Cuz used car salesmen are known far and wide as honest individuals looking out for the consumer -HA HA! And of course it is seated within the Fed.

BANK CAPITAL STANDARDS: Would set new size- and risk-based capital standards, including a prohibition on large bank holding companies treating trust-preferred securities as Tier 1 capital, a key measure of a bank’s strength. Would grandfather trust-preferred securities for banks with less than $15 billion in assets, enabling them to continue treating the securities as Tier 1 capital. Larger banks would have five years to phase-out trust-preferred securities as Tier 1 capital.

Now this provision was raised to $15b to cover one Arkansas bank for Blanche. Hey this needed to be done, Tier 1 should really be Tier 1.

Here is a twofer, they gutted the most important part IMO

MORTGAGES: Would establish new national minimum underwriting standards for home mortgages. Lenders would be required for the first time to ensure that a borrower is able to repay a home loan by verifying the borrower’s income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans.

Well! What a novel idea! VERIFYING INCOME, CREDIT AND EMPLOYMENT before underwriting a mortgage! Why didn’t anyone think of this sooner? Frakkin maroons.

SECURITIZATION: Banks that package loans would, broadly, be required to keep 5% of the credit risk on their balance sheets. Would direct bank regulators to exempt from the rules a class of low-risk mortgages that meet certain minimum standards. Regulators could permit alternative risk-retention arrangements for the commercial mortgage-backed securities market.

They do NOT have to retain 5% of the credit risk on ‘plain vanilla mortgages’. Listen IMO they should ABSOLUTELY HAVE TO RETAIN A MINIMAL EXPOSURE ON EVERY SINGLE MORTGAGE THEY WRITE.  Skin in the game for them as well as the home buyer. Ya dig? But noooooo…

The details are left to the regulators throughout, so the fox is guarding the henhouse again – regulatory capture baby. This TBTF issue is alive and well as we enter the second leg down in housing and UE remains elevated at 10%. Our stress tests did not foresee the continued decline in housing values coupled with extended prolonged 10% UE. These guys need more capital. Treasury wanted authority to do bail outs and it looks like they still have it.:

NEW REGULATORY AUTHORITY: Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm’s collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Treasury would supply funds to cover the up-front costs of winding down the failed firm, but the government would have to put a “repayment plan” in place. Regulators would recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets.

FINANCIAL STABILITY COUNCIL: Would establish a new, 10-member Financial Stability Oversight Council, comprising existing regulators charged with monitoring and addressing system-wide risks to the nation’s financial stability. Among its duties, the council would recommend to the Fed stricter capital, leverage and other rules for large, complex financial firms that are judged to threaten the financial system. In extreme cases, it would have the power to break up financial firms.

We wait for further drill down on details and regulatory implementation timelines. JPMChase seems to have taken the biggest hit IMO, and ha ha ha since Jamie Dimon LOOOOVED him some Obama. Maroons.

June 25, 2010. Tags: , , , , , , , , , , , . CITI, citigroup, Economy, FDIC, Finance, Housing, Obama Administration, Politics, TARP, Taxes, Wall St.

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