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Monday, August 09, 2010 1:11 PM


Financial Reform Act Requires 67 Studies and 243 New Rules Not Yet Created


Previously I did a tongue-in-cheek post claiming that the Financial Reform Bill was a Stunning Success given that it accomplished virtually nothing while doing no further major economic damage.

Today I see I was overly optimistic (which as regular readers know is simply part of my nature).

There are 67 Studies and 243 New Rules that still need to be done, and Lord only knows what kind of damage those will entail.

Please consider Crash of 2015 Won’t Wait for Regulators to Rein In Wall Street

The financial system experiences a crisis “every five to seven years,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the Financial Crisis Inquiry Commission in January. By that measure, the next crash could come by 2015 -- years before new banking reforms are in place.

Many of the measures ordered by Congress and global regulators, aimed at cushioning the financial system in future crises, are years away from being implemented. The Basel Committee on Banking Supervision plans to give the world’s banks until 2018 to comply with limits on how much they can borrow. Parts of the Volcker rule, a provision of the new Dodd-Frank Act that would force firms to cut stakes in in-house hedge funds and private-equity units, may not go into effect for a dozen years.

“Based on our experience of government’s ability to execute these things effectively and in a timely way, we are almost uncovered now from any future financial risk for at least another 8 or 10 years, and that’s a little scary,” said Roy Smith, finance professor at New York University’s Stern School of Business and a former banker at Goldman Sachs Group Inc.

Banks will have until the beginning of 2013 to meet the new minimum capital requirements and “several years beyond that” to create new capital buffers and meet more stringent definitions of what constitutes capital.

The Dodd-Frank Act requires 67 studies and 243 new rules to be created, according to law firm Davis Polk & Wardwell LLP. The act creates a Financial Stability Oversight Council with 10 voting members, including a to-be-named insurance expert and heads of at least 3 regulatory agencies awaiting new leaders. The law’s Volcker rule, which bans banks from proprietary trading and limits investments in private equity and hedge funds, requires a study by the council before rules are drafted.

The Basel committee, which in December proposed a set of new guidelines for leverage, capital and liquidity, came under attack by financial companies and some governments who thought the limits would curb lending and hamper an economic recovery.

The Basel committee, which in December proposed a set of new guidelines for leverage, capital and liquidity, came under attack by financial companies and some governments who thought the limits would curb lending and hamper an economic recovery.

[In response] The Basel committee agreed last month to give banks more leeway in the types of assets they can count as capital.

In effect, the policy allows banks several years of padding their capital with future profits instead of imposing immediate remedies, a policy sometimes referred to as “regulatory forbearance” that’s a little like allowing drivers to build up speed before buckling a seatbelt.

Delaying reform until “2018 is like doing nothing because you know the world will change many times between now and 2018,” said Simon Johnson, former chief economist for the International Monetary Fund who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management. “You should worry a lot about the next round of the cycle.”
Note the line about padding bank profits before there is any reform. Think those reported bank earnings were real?

JPMorgan Chief Executive Officer Jamie Dimon is highly likely correct about another financial crisis before 2015. If so, expect JPMorgan's derivatives unit to be smack in the middle of it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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