Washington, District of Construction

While reading highlights of the near-finished Congressional reform of the U.S. financial services industry, I was reminded of two things. First, the 2009 United Van Lines migration report that listed Washington, D.C., as having the highest in-bound percentage of any “state” in the nation (i.e., people moving in versus moving out).

Second, a friend’s telling me after his recent trip to D.C. that he has never seen so many cranes on active building projects. While the troops suffer on the economic front lines, the commanders live in luxury. Not exactly the George Washington way. If the pending financial overhaul bill gets final approval, it will only get worse.

The 2,300-page bill couldn’t be more foreign to nearly all Americans. Derivatives, hedge funds, default swaps, proprietary trading, Tier 1 capital…the terms are mind-numbing to anyone whose only Wall Street experience came on a double-decker tour bus.

I’m in a financial job and the bill summary I read might as well have been the tutorial my mechanic gave me on how to replace my car’s instrument panel.

For those who know, the consensus is that the bill could have been worse on financial institutions. Moderate Democrats, especially those representing New York, kept the extreme, “let no crisis go to waste” crowd in check.

Big banks will live to see another day, though they will have to get creative to replace lost revenue sources. “Free Checking” may soon become “Cheap Checking.”

When lawmakers lack the political courage to eliminate something altogether (or let it alone completely), they often institute rules of engagement that some regulator has to enforce, a labor-intensive proposition. It’s cheaper to police a driving ban than to enforce speed limits.

Speed limits are what Congress has largely done here with many additional registering, reporting and oversight requirements. According to Timothy Ryan of the Securities Industry and Financial Markets Association, the reform bill has 200 some-odd items whose details must be fleshed out by regulators even before they can be enforced.

The bill creates some regulatory agencies from scratch (e.g., the Consumer Financial Protection Bureau and a “systemic risk council”) and loads up others with more things to track (e.g., the Federal Reserve and the SEC). Unfortunately and mysteriously, the bill fails to address Fannie Mae and Freddie Mac, two principal players in the recent housing bubble and collapse.

Under the bill, firms can keep investing in hedge and private equity funds but only with so much of their capital. Banks can continue to securitize mortgages, but they must keep a certain percentage of them on their own books.

I’m not opposed to such measures. Federally-insured banks should have limitations on their investing. Securitizers should have skin in the game.

I just wish that for every new regulation Congress passes it would find an old regulation (and an old regulator!) to eliminate. Then, the represented would gain confidence that their government is changing with the times, not merely piling on rules.

Then, moving trucks and construction cranes may appear in a city near you, not just in the District of Construction.

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