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In the biggest Financial overhaul made since the Big Deal of the 1930′s is a step closer in regulating the Financial Sector. In what has caused the 2007 market crash and downturn of world economies will now be reigned in closer to the Financial Oversight committee. We’re a step closer which now seems 99% certain that both Democrats and Republicans will support the overhaul for President Obama to sign.  A U.S. Senate-House of Representatives panel has completed a bill overhauling financial regulation.  The bill must now win approval in each chamber before it can go to President Barack Obama to be signed into law.

Here is a brief look at the bill’s main provisions:

SWAPS PUSH-OUT/DERIVATIVES:

Wall Street firms that dominate the $615-trillion over-the-counter derivatives market would have to spin off dealing operations in some swaps, but could keep many swaps in-house, including derivatives to hedge their own risk. Much OTC derivatives trading would be redirected through more accountable channels such as exchanges and clearinghouses. Many OTC contracts end-users could carry on as before. Moves most derivatives to exchanges, routed through clearinghouses,e etc.  Customized swaps remain OTC, but have reporting requirements. New capital, margin, reporting, record-keeping and business conduct rules for firms that deal in derivatives. Failed to overturn CFMA.

TOO BIG TO FAIL: 

The new regulation does not directly address either the repeal of Glass Steagall or TBTF. The crisis legacy is a financial services sector that is highly concentrated with dramatically reduced competition. The six largest financial firms — combined assets: $9.4 trillion — will still dominate the industry.  Too-Big-to-Fail remains the law of the land. This is in particular to prevent massive bailouts like AIG’s and disastrous bankruptcies like Lehman Brothers’, the bill calls for a new government “orderly liquidation” process for financial firms on the verge of collapse. Authorities could seize and liquidate them, with costs covered by sales of assets and fees on other firms if needed.

MORTGAGE UNDERWRITING STANDARDS:

Establishes new minimum underwriting standards for mortgages. No more no doc, NINJA, or Liar loans. Lenders must verify income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans. Of all the regulatory changes passed today, this seems to be the only one that, if in place a decade ago, would have prevented (or at least dramatically reduced) the crisis.

NEW REGULATORY AUTHORITY: 

Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts; creates a sector rescue fund from banks with > $50B in assets. The time to assess this fee is before a crisis, not after — when banks need every penny of capital.

LEVERAGE: 

Inexplicably, all of the new regulations fail to reduce leverage rules today. Banks would have to set aside more capital to ride out tough times, but will get several years to comply.

FINANCIAL STABILITY COUNCIL: 

10-member Financial Stability Oversight Council to address system-wide risks to stability, with the power to break up financial firms.  Oh, and about that leverage thingie? Directs them to look into it. Question: Why not address leverage NOW, instead of kicking it down the road? Is Congress really THAT cowardly?

CREDIT RATING AGENCIES: 

Sets up a quasi-government entity to address conflicts of interest. Allow investors to sue credit-rating agencies. Establishes new SEC oversight office. Retains Oligopoly; Fails to open ratings to more competition. Considering that the ratings agencies were the prime enablers of the crisis, this failure is shameful.

VOLCKER RULE:

Curbs propriety trading by FDIC insured depository institution. Would not have pevented this crisis, but addresses the moral hazard of banks in the future due to the bailout. Goldmann Sachs will benefit the most from this ruling. This will limit the growth of the biggest banks; and curb banks’ involvement in private equity and hedge funds, except for small investments allowed by a loophole added to the rule late in debate. Some big banks’ profits would be pinched by both the Volcker rule and the Lincoln swaps plan, with a few Wall Street giants potentially facing structural changes.

CORPORATE PAY:

Give shareholders a non-binding vote on executive pay. No clawback provisions. Does not address imposing liability on management for excess risk taking, corporate collapse or taxpayers bailouts.

FEDERAL PRE-EMPTION OF STATE BANKING RULES:

Overturns OCC tool John Dugan Federal pre-emption of state regulations. States to impose their own stricter consumer protection laws on national banks. National banks can seek, and will likely receive exemptions from state laws, undercutting this entire law. The first federal monitor for state-policed insurers would be formed. It’s not federal regulation — yet.

DEPOSIT INSURANCE:

Permanently increases FDIC for banks, thrifts and credit unions to $250,000. Fly int he ointment: Congress failed to fund this, although the FDIC will be covered by taxpayers if and when they run out of cash.

CONSUMER AGENCY:

The bill would set up a new bureau in the Federal Reserve to regulate mortgages and credit cards. The watchdog has sharp teeth, but couldn’t bite car dealers, who won an exemption. The new Consumer Financial Protection Bureau is a half decent idea, but the exemption for Auto Dealers — the typical family’s 2nd biggest purchase is a car — is unconscionable.  Putting the agency inside the Federal Reserve is beyond idiotic.

Summary

The financial overhaul isn’t as bad as intially thought, that is for the banks. This has increased more government oversight but it still doesn’t resolve nor prevent the next Financial Crisis. Freddie and Fannie issue still hasn’t been resolved-mortgage holders where every ordinary American taxpayer is still paying to support the two agencies. This isn’t a stricter regulation so the winner is Wall Street. Main Street loses here with the exception of lower debit card fees which is pretty ridiculous because the banks will soon pass that loss of income by other means. We’ll probably see annual fees added to credit cards where it wasn’t charged intially.

In its financial overhaul legislation, Congress seems to be sending a message to the nation’s banks: Be very small or very big. In many ways, the banks most affected by the new legislation will be regionals. The largest banks have the scale and revenue diversification to dilute–or circumvent–the costs of the slew of new regulations that will likely follow the financial overhaul bill. Community banks with less than $10 billion in assets, on the other hand, are escaping the overhaul almost entirely.

Losers

George Engelke Jr., chairman and CEO of Astoria Financial Corp. (AF), with consternation. His Lake Success, N.Y., company, with $20 billion in assets, is one of the nation’s largest thrifts, and will get hit with new capital rules and a new regulator. “We didn’t cause all these problems,” he said. Big banks get off easy, he complained, while the bill “primarily smacks around” regional banks with more than $15 billion in assets. The bill stipulates that in five years trust-preferred securities won’t count as Tier One capital, a critical regulatory measure. Though many of the trust-preferreds will have matured in five years, Engelke is worried regulators might take a tougher stance and force banks might to replace them with equity earlier.

Senate Agriculture Chairman Blanche Lincoln (D., Ark.) raised the exemption from the rule about trust preferred securities for banks with assets of more than $10 billion, a move that will shelter Arvest Bank Group Inc. of Bentonville, Ark., Lincoln’s home state. Arvest Bank is predominantly owned by the Walton family, of Wal-Mart Stores Inc. (WMT). “I can’t call anybody” in Congress to lift the threshold further, Engelke said. “If I were Wal-Mart, the rules would be $25 billion.” Left unaddressed is why trust-preferred securities have merit in small banks but not in large ones, he said.
A spokeswoman for Lincoln said last week she was pushing the change to make sure “no Arkansas bank–no matter its owner–is punished” by the provision.”

Astoria is also going to be impacted by the merger of its primary regulator, the Office of Thrift Supervision, into the Office of the Comptroller of the Currency. Engelke fears that the OCC, to prove itself to Congress, will take a tougher stand than the OTS. Thrifts “are going to pay the price” for the “leaning curve” at the OCC as well, he said.  Indeed, some thrifts or even regional banks may seek to be regulated by state banking supervisors, who bankers feel might have a better understanding of their specific local needs, rather than federal overseers. Regional banks larger than Astoria got hit even harder. Those with more than $50 billion in assets will pay a fee to cover the cost of the financial overhaul. All banks have to pay more attention to state laws because federal regulators would not be able to preempt state legislation as easily as they can now. All this will add to the banks’ legal and regulatory costs, without creating too much of a headache for the big banks.
Banks with less than $10 billion in assets will escape the consumer protection bureau established in the legislation. The community banks are clearly the winner of this bill.