The New Finance Bill: A Mountain of Legislative Paper, a Molehill of Reform

Thursday the President pronounced that "because of this [financial
reform] bill the American people will never again be asked to foot the
bill for Wall Street's mistakes."

As if to prove him wrong, Goldman Sachs simultaneously announced it
had struck a deal with federal prosecutors to pay $550 million to settle
federal claims it misled investors - a sum representing a mere 15 days
profit for the firm based on its 2009 earnings. Goldman's share price
immediately jumped 4.3 percent, and the Street proclaimed its chair and
CEO, Lloyd ("Goldman is doing God's work") Blankfein, a winner.
Financial analysts rushed to affirm a glowing outlook for Goldman
stock.

Blankfein, you may recall, was at the meeting in late 2008 when Tim
Geithner and Hank Paulson decided to bail out AIG, and thereby deliver
through AIG a $13 billion no-strings-attached taxpayer windfall to
Goldman. In a world where money is the measure of everything,
Blankfein's power and influence have grown. Presumably, Goldman can
expect more windfalls in future years.

Although the financial reform bill may have clipped some of Goldman's
wings - its lucrative derivative business may require Goldman to
jettison its status as a bank holding company, and the access to the Fed
discount window that comes with it - the main point is that the Goldman
settlement reveals everything that's weakest about the financial reform
bill.

The American people will continue to have to foot the bill for the
mistakes of Wall Street's biggest banks because the legislation does
nothing to diminish the economic and political power of these giants. It
does not cap their size. It does not resurrect the Glass-Steagall Act
that once separated commercial (normal) banking from investment (casino)
banking. It does not even link the pay of their traders and top
executives to long-term performance. In other words, it does nothing to
change their basic structure. And for this reason, it gives them an
implicit federal insurance policy against failure unavailable to smaller
banks - thereby adding to their economic and political power in the
future.

The bill contains hortatory language but is precariously weak in the
details. The so-called Volcker Rule has been watered down and delayed.
Blanche Lincoln's important proposal that derivatives be traded in
separate entities which aren't subsidized by commercial deposits has
been shrunk and compromised. Customized derivates can remain
underground. The consumer protection agency has been lodged in the Fed,
whose own consumer division failed miserably to protect consumers last
time around.

On every important issue the legislation merely passes on to
regulators decisions about how to oversee the big banks and treat them
if they're behaving badly. But if history proves one lesson it's that
regulators won't and can't. They don't have the resources. They don't
have the knowledge. They are staffed by people in their 30s and 40s who
are paid a small fraction of what the lawyers working for the banks are
paid. Many want and expect better-paying jobs on Wall Street after they
leave government, and so are shrink-wrapped in a basic conflict of
interest. And the big banks' lawyers and accountants can run circles
around them by threatening protracted litigation.

Why do you think Goldman got off so easily from such serious charges
of fraud?

Reliance on the discretion of regulators rather than structural
changes in the banking system plays directly into the hands of the big
banks and their executives and traders who contribute mightily to
Democratic and Republican campaigns. The flow of money virtually
guarantees that regulatory agencies won't be adequately staffed to
enforce the law, that penalties for violations won't be overly onerous,
and that all loopholes (what's a "derivative"? what has to be listed on
exchanges? exactly how much capital must be on hand for which
transactions? How are the various forms of predatory lending to be
defined?) will be easily stretched in future years. Wall Street lawyers
will have a field day. The profit-for-nothing sector of the economy
(law, accounting, finance) will continue to grow buoyantly.

Make no mistake: As long as there's no fundamental change in the
structure of Wall Street - as long as the big banks stay as big and are
allowed to grow bigger, and have every incentive to invent new financial
gimmicks with which to bet other peoples' money - they will remain too
big to fail, and too politically powerful to control.

Goldman's share price, as well as those of JP Morgan Chase,
Citicorps, Morgan Stanley, and Bank of America, will no doubt soar the
basis of the final bill because their future profits are almost
guaranteed. The pay of their executives and traders, and of the managers
of hedge funds and private-equity funds they deal with, will likewise
accelerate. In the short term the economy will benefit, at least to the
extent financial entrepreneurship is now the apex of American wealth and
innovation. But over the longer term we will be much weaker for it.

Congress has labored mightily to produce a mountain of legislation
that can be called financial reform, but it has produced a molehill
relative to the wreckage Wall Street wreaked upon the nation.