Let's have a show of hands. Is anybody out there really expecting financial reform? Does anybody think that the legislation just hammered out in Congress is going to have a measurable impact on the problems that led to the worst financial crisis since the Great Depression? Hmm ... let's see. Peering through the computer, I see absolutely no one raising a hand. That's what I expected. Well, guess what? You're wrong. Financial reform has arrived. And let me tell you, this is good news. All the big banks that you'd expect to fear financial reform -- from the ever-popular Goldman Sachs ( GS) to Citigroup ( C), JPMorgan Chase ( JPM), Morgan Stanley ( MS) and Bank of America ( BAC) -- all can breathe a sigh of relief. As best as I can tell from the reports out of Washington, they're about to be beneficiaries of the kind of reform they enjoy the most: Reform, Washington Style. Oh sure, they're not totally in the high cotton. A watered-down version of the Volcker Rule, imposing restrictions on bank proprietary trading, emerged from the congressional Cuisinart. That proposed new consumer protection agency, under the consumer-loving aegis of the Federal Reserve, looks like it hasn't been completely emasculated, and it may inconvenience some lenders. Derivatives may become just a little bit less of a Wild West. After all, you can't very well expect financial reform that doesn't have any reform component whatsoever. But overall, I'd say that the big banks, the not-so-big banks, and even the auto dealers, pawnshops, payday lenders and street corner loan sharks are out of the woods. No wonder the bank stocks rallied when the financial reform bill was finally hammered out on Friday. See, it's all a question of how you define "reform." Most people who aren't Hill-savvy define reform the old-fashioned way. When I was a kid in the Bronx, we used to have something up there called "Reform Democrats" who always wanted to kick out the "Machine Democrats" like the unlovable old crook, Boss Charlie Buckley. Reform meant "get the bums out." As defined by the dictionary, reform is the improvement or amendment of what is wrong, corrupt, unsatisfactory, etc. But as used in Congress, it means the degrading or weakening and the making of something more wrong, more corrupt, more unsatisfactory, or maybe just doing nothing at all and making believe it's reform. Using the latter definition of the term, there's plenty of financial reform going on in Washington, and has been for some years.
You can always tell what kind of reform is coming down the pike. Just clock the amount of agonizing involved. What you've been seeing in Washington -- tortured, soul-searching groping for a financial reform package -- is characteristic of what happens when Congress considers actually making things better. Note how much time it's taken for that to crawl through Congress, and look how it's been eroded every step of the way. Remember that the actual financial crisis took place two years ago. But when Congress considers reforms of the second kind, the reforms that actually make things worse, it acts decisively, consistently, and with commendable strength of purpose. Consumer bankruptcy laws are a good example of that. You have to go back to the late 1970s to find an era in which bankruptcy has performed the function for which bankruptcy is traditionally designed, which is to give overburdened debtors the opportunity to free themselves of crushing debt. Since the last major overhaul of bankruptcy laws was enacted in 1978, which resulted in a climb in bankruptcy filings because people were actually using the law, the banking industry has been on an antibankruptcy jihad. Beginning in 1984, one "reform" measure after the other, pushed by the banking lobby, has eroded consumer bankruptcy protection over the years, culminating in a 2005 Bush-era law that made it harder than ever for hard-up consumers to get a fresh start. Just as "bankruptcy reform" crippled bankruptcy for consumers, the Private Securities Litigation Reform Act of 1995 made class action suits a nonissue for victims of crooked CEOs. Since class action lawyers have had their own spate of scandals, I haven't seen anyone other than trial lawyers complaining much about that. But the important thing here is the nomenclature. This was not the Private Securities Litigation Castration Act, as it might have been more accurately named. The same can be said for tort reform, which actually means "Torts are OK," and "medical liability reform," which means "let medical errors go unpunished." Here you go -- the U.S. Chamber of Commerce can tell you about all the things it wants to "reform" out of existence.
When you "reform" the tort laws by making it easier to get away with committing torts, it's the functional equivalent of "modernizing" laws by returning to the straw-hat era. Just look what happened in 1999, when Congress turned the clock back seven decades, repealing Glass-Steagall via the Financial Services Modernization Act, a.k.a. Gramm-Leach-Bliley. It was in that very same spirit of reform, modernization and all-around good government that Congress, in its deliberations on the legislation, decided to reform, modernize and significantly improve Sarbanes-Oxley. It hasn't gotten very much attention, what with the stock market hiccupping and BP ( BP) being bad and the despoilment of the Gulf of Mexico on everybody's minds, but you'll be interested to know that a significant defect in the Sarbanes-Oxley Act of 2002 is being addressed as part of the financial reform package. The defect is that it might actually stop fraud. Both the House and the Senate agreed that companies with under $75 million market capitalization should be exempt from Section 404(b), which requires independent auditors to attest to the adequacy of their internal financial controls. The companies most prone to cooking the books are no longer covered, so a weak, rarely enforced joke of a law is now a meaningless, rarely enforced joke of a law. Now, that's what I call reform! So if you burrow down into the financial news deep enough to read about the tattered remnants of financial reform, be sure to keep your definitions in mind and you won't be disappointed. P.S. Charlie Buckley actually did get kicked out by those reformers back in 1964. Since then, Bronx politics has been clean as a whistle.