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They Call This Financial Reform?

While the financial reform bill passed and will soon be the law, it is hard to comment on any specifics because the real laws have yet to be written. Normally, when Congress passes new legislation, it is pretty specific in its intent, and Congress leaves it up to those who must enforce the laws to write rules and regulations clarifying Congressional intent.

This time, however, Congress was extremely vague in many areas, giving non-elected bureaucrats carte blanche to write rules and regulations which will become the law! Still, despite not knowing exactly what we will get, it is possible, at this time, to determine some winners and losers.

Winners and Losers

There are some big winners: lawyers and lobbyists; folks in Congress who will be consulted regarding what the rules and regulations should say; and those who want yet bigger government. There is a group that will, most likely, come out neutral: Wall Street and the "Too Big to Fail." Then there are the losers: community banks, small businesses, the taxpayer, and those who believe in free markets.

Lawyers and lobbyists will now earn megabucks trying to influence what the rules and regulations (at least 243 of them) will say and to carve out exceptions for their clients. Imagine the political donations that will now flow to Congressmen who are influential with those non-elected bureaucrats who are now crafting the language.

Wall Street, which has recently pulled back on its political contributions, can be expected to flood Washington with money in order to ensure that rules and regulations surrounding such things as the Volcker Rule (proprietary trading) and derivatives do not have a large negative impact on how they currently operate.

At this writing, while I can't say for sure they will be successful, but having observed the system for many years, I would bet heavily in favor of Wall Street. This particular piece of legislation will further concentrate the financial system and strengthen what I have referred to in other writings as the " Unholy Washington-Wall Street Alliance. "

Community banking and small business are the biggest specific losers. Even prior to this legislation, community banks have been under huge regulatory stress and most now have capital constraints. But even those with the ability to lend have determined that, with loan loss reserves required against newly made loans and capital required as a cushion, it simply isn't worth it -- just buy Treasuries, which require no loss reserves or capital. And that appears to be what Washington wants, as it needs every outlet it can find for its burgeoning debt.

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