And so the financial reform bill has been passed by the US Senate. But who exactly benefits? There are too many loopholes in this legislation ensuring that nothing will change.
On one level, the legislation is the most seismic change in the US financial system since Roosevelt did his thing during the Great Depression. Summed up nicely by The Guardian, measures include a consumer financial protection bureau, clearing houses that will provide some sort of monitoring for the $600 trillion derivatives market and last minute rules requiring banks to sell their derivatives dealing business and giving the US government the power to seize and wind up any large financial institution that runs into difficulties and poses a risk to the wider financial system. The US Government will have the power to wipe out shareholders and fire executives.
Will it fix the system? That's unlikely because the controls on derivatives aren't rigorous enough. A few weeks ago, I warned that derivatives were a ticking time bomb because they encourage the risky trades that produced the global financial crisis and Commodities Futures Trading Commission Chairman Gary Gensler says that some derivatives should be illegal. The other problem is that derivatives trading that occurs outside the clearing houses is not illegal. In other words, a trade that does not go through a clearing house is not deemed void or unenforceable under the legislation. That creates an incentive for traders to keep operating under cover of darkness. The shadow banking economy that created the crisis will continue to grow unchecked.
Newsweek's Michael Hirsh says that the only way this bill will save the US economy is that it will be a goldmine for accountants and lawyers. One thing for sure, it's likely to make the banks even bigger and more powerful. They will be able to create more crises.
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