Bill has many rules, critics

NEW YORK — To keep taxpayers from having to bail out giant banks again, lawmakers faced two choices: design rules to try to prevent them from failing, or shrink them so that if they do fail, they won’t threaten the financial system.

Our political leaders chose the rules.

At more than 2,000 pages, the new financial regulatory bill takes aim at everything from megabanks straddling the globe to street-corner payday lenders. And with a bit of luck, the overhaul — the most sweeping since the Great Depression — will help make big-bank failures less likely and less damaging if one does occur.

Whether it succeeds rides on how dozens of regulators, including the Securities and Exchange Commission and the Federal Reserve, fill in the details, because a lot was left up to them. The bill calls for banks to hold more money as a cushion against risks, but it doesn’t say how much. It also was mum on the amount of cash that firms dealing in complex derivatives need to set aside in case those bets sour. Lobbying by industry and advocacy groups is expected to be fierce in the months ahead and take place mostly behind closed doors. It will take years for many of the rules to take effect.

But one thing is clear: For the nation’s biggest banks, it could have been a lot worse.

In the Senate’s version of the bill, banks such as Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan Chase & Co. would have been barred from trading derivatives. In the final one, banks lose only a sliver of that business.

Another near-miss for Wall Street involved a ban on banks investing in hedge funds and private equity firms. The bill limits those investments, but not enough to hurt most big banks, says Dean Baker, co-director of the left-leaning Center for Economic and Policy Research.

"Those guys walked away pretty happy," he says.

Perhaps the biggest victory for giant banks: They get to stay big. A proposed amendment to cut them down to size was killed after receiving scant support.

"There’s no magic bullet, so they need to be small enough to fail," says former International Monetary Fund chief economist Simon Johnson. Dallas Federal Reserve chief Richard Fisher agrees, stating in a recent speech that the "only" way to end bank bailouts is to "shrink ’em." Henry Kaufman, an elder statesmen among economists, puts it succinctly: "Break them up."

The stakes are high because banks are bigger than ever.

Thanks in part to acquisitions of Countrywide Financial Corp. and Merrill Lynch & Co., the assets of Bank of America Corp. have jumped 36 percent from before the financial crisis to $2.34 trillion. JPMorgan bought Bear Stearns Cos. and Washington Mutual Inc. and has assets of $2.14 trillion, up 37 percent.

The top four banks now have 40 percent of the nation’s deposits.

The legislation increases government oversight of these and other big, interconnected financial firms. The goal is to identify problems early and address them — not allow them to grow until a giant bank is in trouble and a threat to the financial system. If the problems do mushroom and a big bank is failing, the new rules include a plan to seize and liquidate the bank. The enormous cost of doing that would be paid by other giant banks, not taxpayers. At least, that’s the theory.

When Lehman Bros. got in trouble two years ago, the government lacked the authority to take it over. Lehman filed for bankruptcy, and other banks feared that firms with money tied up at Lehman might fail, too. Trust evaporated. Credit markets froze, and the stock market crashed. Under the new plan, the thinking goes, everyone linked to a failing bank would know that money was on its way and so they would be less likely to panic. Think of the orderly closings of smaller banks by the Federal Deposit Insurance Corp. every week — writ large.

To keep financial firms from collapsing in the first place, the bill calls for a new Financial Stability Oversight Council headed by the Treasury secretary to crack down on risk that threatens the financial system.

But a big question remains: Will these top cops even be able to spot problems early? The record isn’t encouraging.

As late as May 2007, Fed Chairman Ben Bernanke predicted damage from reckless lending to homeowners with bad credit would "likely be limited." Treasury Secretary Henry Paulson also failed to finger these risky loans as a systemic risk.

"I don’t see (it) imposing a serious problem," he said in April of the same year.

Before the crisis, there was a patchwork of regulators overseeing the financial industry. But each was too focused on firms under its watch to see dangerous practices across the industry. For instance, few regulators among the many overseeing mortgages questioned lenders who stopped requiring borrowers to prove they could pay back their loans. Defaults mounted. When regulators woke up to the danger, it was too late.

The bill’s key change aimed at fixing that problem eliminates the Office of Thrift Supervision. The OTS oversaw many of the riskiest players during the housing boom: Washington Mutual, IndyMac Bank and Countrywide. All were either sold in a fire sale, bailed out by taxpayers or seized by the government before they collapsed.

But critics are skeptical about whether the new council will be able to coordinate the various regulatory agencies and fulfill its mission.

"People are worried about the next bubble, and whether regulators will miss it and refuse to act upon it," says Robert Litan, an economist at the Ewing Marion Kauffman Foundation, which supports entrepreneurship programs.

The legislation gives regulators power to break up the biggest financial firms if they threaten the entire system. But some proposed crackdowns were cut from the bill. And the fate of many of those that remain are in the hands of regulators who must write the rules and then implement them in the years ahead. The record of regulators — like the OTS — is spotty.

The big banks could also claim a victory, of sorts, when it comes to the regulation of derivatives.

Derivatives are bets between two parties on how the value of an asset will change. They are often used by companies to hedge risks. A bank that fears its borrowers will default on their loans might use a derivative that pays off if that happens, thus minimizing its losses.

But derivatives can be used to speculate, too. A bank might use derivatives to bet that the value of an asset it doesn’t own will go up or down. Derivatives were used just this way to bet on the housing market. Often, banks borrowed huge sums of money to make these bets. That magnified losses when home prices crashed. It was as if the market was several times bigger than its actual size, and that made the meltdown worse.

Thanks to such gambles, American International Group Inc. nearly collapsed and required a $182 billion bailout by the government. Regulators were scarcely aware of the massive bets made by AIG and other financial firms because they were struck in private deals.

The new bill requires federal oversight of lucrative derivatives for the first time. It requires many types of derivatives to trade on exchanges so regulators can better watch them. Banks using them must put aside money in case they lead to losses, something AIG was not required to do.

An original version proposed by Sen. Blanche Lincoln, D-Ark., would have forced federally insured banks to spin off their derivatives trading businesses. Under the current bill, banks would only have to spin off their riskiest derivatives trades. They would be able to keep trading derivatives related to things such as interest rates, foreign currencies, gold and silver. They could even arrange credit default swaps, the notorious instruments involving mortgages that were blamed for the meltdown, as long as they were traded through the exchanges.

Hedge fund manager Michael Lewitt, who lashes out at derivatives in his book "The Death of Capital," says that AIG-like bets with derivatives should have been banned, not just moved to exchanges so they will be visible.

"We can have an AIG again because everyone is interconnected and for what? So people can speculate?" Lewitt says. The bill "will prove completely inadequate to prevent future crises."

Under a provision known as the Volcker rule, named for former Fed Chairman Paul Volcker, banks also won’t be allowed to buy and sell securities for their own profit, as opposed to doing that for clients. But the distinction is sometimes vague. For instance, banks often buy shares of companies for "inventory" in their role as middlemen helping clients in their own share purchases. If the bank buys more than needed to help others, it can generate profits. Analysts who have studied the bill say it isn’t clear that this would violate the rules.

Likewise, the legislation will impose a cap of 3 percent on the amount of its capital that a bank can invest in risky hedge funds, private equity funds and real estate funds. Typically, though, such investments already fall below the 3 percent threshold. And banks will still be able to manage such funds and collect fees and a percentage of trading profits.

ad-high_impact_4
Business
Project billed as one of the world's largest marijuana dispensaries plans to open Nov. 1
Planet 13 co-CEO Larry Scheffler talks about what to expect from the new marijuana dispensary, Thursday, July 19, 2018. (Marcus Villagran/Las Vegas Review-Journal) @brokejournalist
Oasis Biotech opens in Las Vegas
Brock Leach, chief operating officer of Oasis Biotech, discusses the new plant factory at its grand opening on July 18. (Bailey Schulz/Las Vegas Review-Journal)
UNLV Tech Park innovation building breaks ground
Construction on the first innovation building at the UNLV Tech Park is underway. (Bailey Schulz/Las Vegas Review-Journal)
Caesars Forum Meeting Center
Caesars broke ground Monday on its $375 million Caesars Forum Meeting Center (convention center) just east of the High Roller observation wheel. (Caesars Entertainment)
Technology reshapes the pawn shop industry
Devin Battersby attaches a black-colored device to the back of her iPhone and snaps several of the inside and outside of a Louis Vuitton wallet. The device, installed with artificial intelligence capabilities, analyzes the images using a patented microscopic technology. Within a few minutes, Battersby receives an answer on her app. The designer item is authentic.
Recreational marijuana has been legal in Nevada for one year
Exhale Nevada CEO Pete Findley talks about the one year anniversary of the legalization of recreational marijuana in Nevada. (K.M. Cannon/Las Vegas Review-Journal)
Young adults aren't saving for retirement
Financial advisors talk about saving trends among young adults. (Bailey Schulz/Las Vegas Review-Journal)
President Trump’s tariffs could raise costs for real estate developers, analysts say
President Donald Trump made his fortune in real estate, but by slapping tariffs on imports from close allies, developers in Las Vegas and other cities could get hit hard.
Las Vegas business and tariffs
Barry Yost, co-owner of Precision Tube Laser, LLC, places a metal pipe into the TruLaser Tube 5000 laser cutting machine on Wednesday, June 20, 2018, in Las Vegas. Bizuayehu Tesfaye/Las Vegas Review-Journal @bizutesfaye
Nevada Film Office Connects Businesses To Producers
The director of the Nevada Film Office discusses its revamped locations database and how it will affect local businesses. (Bailey Schulz/Las Vegas Review-Journal)
Opendoor isn't the typical house flipping company
Unlike most house flippers, the company aims to make money from transaction costs rather than from selling homes for more than their purchase price.
The Venetian gondoliers sing Italian songs
Gondolier Marciano sings a the classic Italian song "Volare" as he leads guests through the canals of The Venetian in Las Vegas. (K.M. Cannon/Las Vegas Review-Journal)
Building In Logandale
Texas homebuilder D.R. Horton bought 43 lots in rural Logandale. (Eli Segall/Las Vegas Review-Journal)
Indoor farming in Southern Nevada
Experts discuss Nevada's indoor farming industry. (Bailey Schulz/Las Vegas Review-Journal)
Former Fontainebleau could have become a Waldorf Astoria
Months after developer Steve Witkoff bought the Fontainebleau last summer, he unveiled plans to turn the mothballed hotel into a Marriott-managed resort called The Drew. But if Richard “Boz” Bosworth’s plans didn’t fall through, the north Las Vegas Strip tower could have become a Waldorf Astoria with several floors of timeshare units. (Eli Segall/Las Vegas Review-Journal)
LVCVA CEO Rossi Ralenkotter announces plans to retire
Rossi Ralenkotter, CEO of the LVCVA, on Tuesday confirmed a Las Vegas Review-Journal report that he is preparing to retire. Richard N. Velotta/ Las Vegas Review-Journal
Cousins Maine Lobster to open inside 2 Las Vegas Smith’s stores
Cousins Maine Lobster food truck company will open inside Las Vegas’ two newest Smith’s at Skye Canyon Park Drive and U.S. Highway 95, and at Warm Springs Road and Durango Drive. Cousins currently sells outside some Las Vegas Smith’s stores and at Fremont Street and Las Vegas Boulevard. (K.M. Cannon/Las Vegas Review-Journal)
Las Vegas home prices to continue to rise, expert says
Lawrence Yun, chief economist at the National Association of Realtors, gives homebuyers a pulse on the Las Vegas housing market. (Eli Segall/Las Vegas Review-Journal)
NV Energy announces clean energy investment
The company is planning to add six solar projects in Nevada, along with the state's first major battery energy storage capacity. Bailey Schulz/Las Vegas Review-Journal
3 Mario Batali restaurants on Las Vegas Strip to close
Days after new sexual misconduct allegations were made against celebrity chef Mario Batali, his company announced Friday that it will close its three Las Vegas restaurants July 27. Employees of Carnevino Italian Steakhouse, B&B Ristorante and Otto Enoteca e Pizzeria, all located in The Venetian and Palazzo resorts, were informed of the decision Friday morning. Bastianich is scheduled to visit the restaurants Friday to speak to employees about the next two months of operation as well as how the company plans to help them transition to new positions.
Nevada has its first cybersecurity apprenticeship program
The Learning Center education company in Las Vegas has launched the first apprenticeship program for cybersecurity in Nevada. It was approved by the State Apprenticeship Council on May 15. (K.M. Cannon/Las Vegas Review-Journal)
Las Vegas union members voting to authorize the right to strike
Thousands of Las Vegas union members voting Tuesday morning to authorize the right to strike. A “yes” vote would give the union negotiating committee the power to call a strike anytime after June 1 at the resorts that fail to reach an agreement. (Todd Prince/Las Vegas Review-Journal)
Small businesses struggle to find qualified candidates
A 2018 survey found that over two-thirds of small businesses in Nevada find it somewhat to very difficult to recruit qualified candidates. Bailey Schulz/Las Vegas Review-Journal
Nevada secretary of state website offers little protection against fraudulent business filings
Property developer Andy Pham tells how control of his business was easily seized by another person using the secretary of state website.
Caesars may be going solo in its marijuana policy
Several Southern Nevada casino companies aren’t following Caesars Entertainment’s lead on marijuana testing.
How much is the Lucky Dragon worth?
Less than a year-and-a-half after it opened, the Lucky Dragon was in bankruptcy.
Gyms and discount stores take over empty retail spaces
Grocery stores used to draw people to shopping centers. But many large retail spaces have been vacant since 2008. Discount stores like goodwill and gyms like EOS Fitness are filling those empty spaces, and helping to draw shoppers back in. K.M. Cannon/Las Vegas Review-Journal
Funding source of Las Vegas stadium for the Raiders is sound, expert says
The stadium is funded in part by $750 million of room taxes, the biggest such tax subsidy ever for a professional sports stadium. Robert Lang, executive director of Brookings Mountain West and The Lincy Institute at UNLV, says that is a good use of public funds. (Richard Velotta/Las Vegas Review-Journal)
Las Vegas needs light rail, expert says
Robert Lang, executive director of Brookings Mountain West and the Lincy Institute said he is afraid of a "congestion mobility crisis." Las Vegas needs a light rail system, he said, to accommodate the city's growing number of attractions. (Richard Velotta/Las Vegas Review-Journal)
Three takeaways from Wynn Resorts' Earnings Call
Matt Maddox came out swinging in his first earnings conference call as Wynn Resorts chief executive officer, boasting of record Las Vegas quarterly revenues and applicants lining up for work.
TOP NEWS
News Headlines
Add Event
Home Front Page Footer Listing
Circular
You May Like

You May Like