There has been a lot of complaining about the new Dodd-Frank financial regulation reform bill -- or FinReg -- by bloggers and politicians. However, most critics (and supporters) haven't read the 2,200+ pages of the bill. The reactions are driven more by pre-existing politics and shorthand biases for the general concept of governmental regulation.

If you think market actors are greedy and that the government keeps everyone honest, you support FinReg. If you think the government is made up of incompetent bureaucrats who get in the way of efficient markets and choice, then you think FinReg is terrible.

It's easy to be cynical about a big reform bill like this (and I am about a number of points in the bill). However, there is some good here. I believe that the politicians have used this bill as an opportunity to move a lot of little balls forward.

Critics trot out phrases like "this bill will do nothing to stop the next crisis." On one hand, they're right that it's hard for traders (let alone politicians) to predict the future. On the other hand, do they seriously think it's best to sit back after 2008 and do nothing?

In my view, here are the best parts of FinReg:

Derivatives OTC clearinghouses

Some estimate that the global market for derivatives is more than $700 trillion. Yet, a large part of it has operated between parties rather than through a clearinghouse. Now, it will and bank profits will go down. I think the system is better off and safer with this change.

Resolution authority

Former Treasury Secretary Paulson argued that he never had the "authority" to take over Lehman Brothers. Barney Frank has backed up Paulson's explanation, which is why he strongly supported the creation of this authority process to specifically deal with that one challenge.

Proxy access

This bill punted the idea to the SEC to define. Proxy access will determine whether shareholders can nominate directors to appear on the company's proxy statement for all shareholders to vote on at the annual meeting. This is good though. At the last minute, Chuck Schumer, Chris Dodd, and Evan Bayh (all Democrats) tried to water down proxy access by stating that shareholders should have to own 5% of the company's stock for over 3 years before being allowed to make a nomination -- thereby making 99% of shareholders ineligible. I'm grateful that Barney Frank pushed back.

A watered down version of Volcker Rule

I supported the Volcker Rule because I saw its intent was to lower the risk of financial institutions by getting them out of proprietary trading with assets that they would not have if not for the depositors' money sitting in "safe" bank accounts. Critics again howled that it wasn't part of the 2008 meltdown. This is one of those issues where I would ask the banks if they want to be short-term rich or long-term rich. Separating the trading from banking will allow all these banks to prosper in the long-term, even if they lose a few pennies in EPS over the next couple of quarters. It's discouraging that the bill version of this rule got watered down.

Unfortunately, there were more disappointments with the FinReg bill than there were positive surprises. Here are the worst parts of FinReg:

No Glass-Steagall

I'm truly surprised that -- amid all the market turmoil -- that there wasn't more calls for Glass-Steagall's return. What will it take? Unless these politicians are being lobbied by someone to do something, it seems unlikely that they're going to come up with it themselves (except if their voters start burning their feet for it). Blanche Lincoln called for the complete separation of derivatives from banks and Wall Street went crazy. The financial system was safer with Glass-Steagall than without. Wall Street will never ask for it back, so others in government will have to insist.

Do we really have a sense of the derivative risk out there?

Ok, so the derivatives are now traded through a clearing house. There are still $700 trillion of them floating out there grand-fathered. Our policy toward them is to cross our fingers. It would be nice to know much more about the potential magnitude of the risk we're living with every day.

No solution for Fannie/Freddie

Nobody wants to tackle the long-term question of what will happen to the government's "conservatorship" of Fannie Mae ( FNMA) and Freddie Mac ( FMCC). These agencies will continue to live in limbo. No politician or journalist brings up the issue for debate on whether they should be nationalized, privatized or remain status quo. Instead, the politicians kick the can.

No changes to how ratings agencies work

Similarly, there was no real change in the FinReg bill on how the large ratings agencies like Moody's ( MCO), S&P -- a unit of McGraw-Hill ( MHP) -- and Fitch will operate. Wall Street needs them and therefore pushed that they continue. There are a few options for how they could be dealt with including turning them into government agencies or cutting out their special status by the government. There aren't simple answers to complex questions and the issue has been pushed off for another day.

What about government spending?

We talk about FinReg not being able to prevent the next fiscal crisis. No one knows what that next issue will be to spur a bank run, but we certainly talk a lot about sovereign debt risk in the world today. Countries have over-spent and it appears that they will continue to run enormous deficits. We hear about the inevitability of tax hikes coming, but where is the talk of cutting government spending? Why is no one talking about cutting Social Security benefits and Medicare? If we're going to get our own sovereign debt in order, we have to look in the mirror and -- unfortunately -- that means we're all going to have to accept less in once-promised government entitlement programs.

A hedge fund manager I know recently went to visit Washington DC politicians and assess their financial acumen. He came away dismayed at the lack of understanding of these very serious issues which will impact us, our children and grandchildren. One senator estimated that only 14 of his colleagues were "true" fiscal conservatives (in the sense of wanting to see the government spend less than its tax revenues). That's shocking. If we want to start with serious financial reform, let's start there.

At the time of publication, Jackson held no positions in stocks mentioned.

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Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at or @ericjackson

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