Comprehensively Speaking

While the Dow Jones Industrials were going to Hell and back, the Senate continued work on the (ta-daa!) Comprehensive Financial Reform Bill. You may recall last week that the dastardly Republicans were filibustering "reform" as part of their multi-generational effort to oppress widows and orphans. But, a funny thing happened; after Dems squeaked about Goldman Sachs, etc. Dodd started caving, er, negotiating in earnest. The results might surprise you: Dodd-Shelby Compromise

The Dodd-Shelby compromise gave Shelby almost everything he wanted in terms of reducing the government's ability to bail out bank creditors and near-insolvent financial firms:

The agreement abandons a $50 billion resolution fund that would have covered the costs of a major financial collapse. Instead, if the amendment is adopted, as expected, the Federal Deposit Insurance Corporation would have the ability to liquidate large firms, and could likely use a credit line from the Treasury Department to cover any costs. Any losses the FDIC encounters would be recovered as the agency sells off the assets of the failed firm.

Using the FDIC, rather than creating a brand-new resolution fund makes sense since (1) everyone knows how the FDIC works and (2) now we don't have to have a $50 billion slush fund sitting around attracting moral hazard like flies to sherbet. As Steven Spruiell notes in the linked article, the GOP - led by Richard Shelby, with an assist from Bob Corker - got virtually everything they wanted:

Shelby's near-total victory on the bailout issues is worth emphasizing because the politics were so stacked against the Senate GOP that even some conservatives started wondering why they were filibustering and holding out for so long, especially after Reid started opportunistically forcing vote after vote. It's because the bailout provisions of the bill were really bad — you can catch up here — and thanks to senators such as McConnell, Shelby and Corker who wouldn't let go of this issue, those provisions are now much improved. Liberals who tried to spin it all as an evil Frank Luntz talking-point conspiracy have reason to feel a little bit foolish today. Dodd was willing to let the administration have the flexibility it wanted to do bailouts until Republicans filibustered the bill. Dodd caved, and the fixes were approved 93-5.

Pretty neat trick for what it supposedly a despised minority.

Meanwhile, the "audit the Fed" movement is also going to be part of the final bill, incredibly enough. "Socialist" Bernie Sanders - he wouldn't last five minutes in a real socialist system - worked out a deal with Dodd to allow the GAO to review the Fed's lending during the crisis: Fed Audit Deal Reached In Senate

Notwithstanding any other provision of law, the Board of Governors shall publish on its website, not later than December 1, 2010, with respect to all loans and other financial assistance it has provided during the period beginning on December 1, 2007 and ending on the date of enactment of this Act under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Term Securities Lending Facility, the Term Auction Facility, Maiden Lane, Maiden Lane II, Maiden Lane III, the agency Mortgage-Backed Securities program, foreign currency liquidity swap lines, and any other program created as a result of the third undesignated paragraph of section 13 of the Federal Reserve Act.

This isn't a complete audit, as it would not touch the Fed's regular non-emergency dealings. Ron Paul for one is crying "sell out!" By a "socialist?" I'm shocked!

So, it looks like we will finally have "comprehensive" financial reform, nearly 20 months after the original Bear Stearnes bailout. And, apparently no one yet has the guts to do anything to reform Fannie Mae and Freddie Mac, which were only ground zero for the whole freakin' crisis. Step by step, I guess.

Everyone's been talking about how they want to get this right because they expect this bill to provide the legal framework for US finance for decades to come. That's nice, but wasn't it a problem that bankers, especially those in the shadow banking system, were able to work around the old system - and everyone knew they had an advantage precisely because they were able to develop work-arounds? Seems like rather than trying to legislate "for all time," it would be much better to recognize that the law in this area needs to adjust to market conditions as they evolve. What, is that too much work?