As if anyone thought otherwise, the final shape of finreg has now been formalized and as Shahien Nasiripour at the Huffington Post notes, "many of the measures that offered the greatest chances to fundamentally reshape how the Street conducts business have been struck out, weakened, or rendered irrelevant." Congrats, middle class, once again you get raped by Wall Street, which is off to the races to yet again rapidly blow itself up courtesy of 30x leverage, unlimited discount window usage, trillions in excess reserves, quadrillions in unregulated derivatives, a TBTF framework that has been untouched and will need a rescue in under a year, non-existent accounting rules, a culture of unmitigated greed, and all of Congress and Senate on its payroll. And, sorry, you can't even vote some of the idiots that passed this garbage out: after all there is a retiring lame duck in charge of it all. We can only hope his annual Wall Street (i.e. taxpayer funded) annuity will satisfy his conscience for destroying any hope America could have of a credible financial system.
From Huff Po:
The two most high-profile provisions were the last items to be considered. Neither emerged intact. One would have forced banks to stop trading financial instruments with their own capital and give up their stakes in hedge funds and private equity funds, named after their original proponent, former Federal Reserve Chairman Paul Volcker. The other would have compelled banks to raise tens of billions of dollars because they'd have to spin off their derivatives-dealing operations into separately-capitalized affiliates within the bank holding company, pushed by Senate Agriculture Committee Chairman Blanche Lincoln. As currently practiced both activities are highly lucrative, annually generating billions for the nation's megbanks.
Ultimately, despite widespread approval among those pushing for fundamental reform in the wake of the worst financial crisis since the Great Depression, yet perhaps aided by near-unanimous revulsion among those on Wall Street, both were watered down in front of C-SPAN cameras beginning around 11 p.m. ET. Democratic lawmakers had been rushing to complete the bill by Friday morning under a self-imposed deadline. The final vote was recorded at 5:40 a.m. The conference began their final day just before 10 a.m. on Thursday.
Among the "compromises" were the push to have Tier 1 instead of Tangible Common Equity as a variable in determining how much could be invested in hedge funds and private firms:
After days of leaks to the news media that the Senate was looking to ease the restrictions, on Thursday afternoon Senate conferees confirmed the rumors: banks could invest up to three percent of their tangible common equity in hedge funds and private equity firms. Tangible common equity -- considered to be the strongest form of bank capital -- is comprised of shareholder equity. A few hours later, the Senate amended its proposal, changing the metric from tangible common equity to Tier One capital. Banks have more Tier One capital than they have tangible common equity, so changing the requirement to the weaker form of capital allows banks to invest more of their cash in hedge funds and private equity funds. The concession was confirmed by Steven Adamske, spokesman for House Financial Services Committee Chairman Barney Frank.
Unlike Dodd, luckily Barney Frank can at least be voted out.
The 1.5% to 3.0% increase was solely dictated by Jamie Dimon so that the firm could keep its investment in mega fund Highbridge and have breathing room for other asset management allocations. From FT:
The limit for JPMorgan Chase, which owns a hedge fund called Highbridge and a private equity group, would be about $2.8bn. People close to JPMorgan said the company had more than $1bn invested in Highbridge alone.
Limits for Morgan Stanley and Goldman Sachs, securities houses with smaller balance sheets, would be lower: about $900m for Morgan Stanley, which has already signalled its intention to sell its stakes in hedge funds, and about $1.78bn for Goldman, which has a large and very profitable fund business.
For those who remember that Obama, to great fanfare, said prop trading would spin off, well, it's good to see the President was purchased by Dimon's henchmen too:
As for the measure's proposed ban on banks trading with their own money, also known as proprietary trading, the agreed-upon provision calls for federal financial regulators to study the measure, then issue rules implementing it based on the results of that study. It could be anything from an outright ban to a barely-there limit.
Finally, on Lincoln's derivative spin off proposal, it appears that one is DOA as well:
Lincoln's divisive measure had been reached.
"There's been some work done by the administration and some of the senators on a potential compromise, I guess you could call it," said Peterson, chairman of the House Agriculture Committee, in a reference to the Obama administration.
The negotiations were not public.
Rather than banks being forced to spin off their swaps desks, they'd be allowed to keep those units dealing with "the biggest part of all these derivatives," Peterson said. The rest would be pushed out to an affiliate.
Under the agreement, reached late Thursday, banks would continue to be allowed to deal interest rate and foreign exchange swaps, "credit derivatives referencing investment-grade entities that are cleared," derivatives referencing gold and silver, and the firms would be allowed to hedge "for the banks' own risk."
Banks would be forced to push out to their affiliates derivatives referencing "cleared and uncleared commodities, energies and metals (with the exception of gold and silver), agriculture, credit derivatives referencing non-investment grade entities and all equities, and any uncleared credit default swaps," Peterson said.
"Frankly, the biggest part of all these derivatives, by far, are the ones that I named that are going to be able to stay in the bank," Peterson added. "Interest rate and foreign exchange are by far the greatest part of the amount of business that's involved here."
In other words, the greatest theatrical production of the past few months is now over, it has achieved nothing, it will prevent nothing, and ultimately the financial markets will blow up yet again, but not before the Teleprompter in Chief pummels the idiot public with address after address how he singlehandedly was bribed, pardon, achieved a historic event of being the only president to completely crumble under Wall Street's pressure on every item that was supposed to reign in the greatest risktaking generation (with Other People's Money) in history.
We hope, with this farce behind us, Goldman and JPMorgan can resume adding to their hundreds of trillions in IR, FX and other swaps promptly, as always oblivious of the end unwind, and finally blow up the world for good when the $1.5 quadrillion in fake credit money collapses into the gold singularity at the bottom of the Exter pyramid, and it all comes crashing down.