Here they “No” Again

Democrats failed to get the cloture vote, on Monday, which is necessary to proceed debate on a financial reform bill that would rein in banks, bring new oversight for hedge funds and derivatives and usher in new rules to protect consumers from risky financial products.

The BBC reports that the bill would include provisions that:

…tackle financial institutions that are “too big to fail”, putting in place a framework that would mean taxpayers do not fund any future bailouts.  Among the bill’s proposals are changes to the derivatives market and tougher legislation to protect consumers.

While Republicans would have you believe they are “looking out for the little guy” on this one, don’t kid yourself.  They are focused on  a few of the proposals in the bill and would like to change it in their favor. Viser writes:

One of the main targets of Republican opposition has been a $50 billion fund that would be used to wind down failing institutions. The fund would be comprised of fees from large financial institutions, but Republican opponents have said that it could still allow for bailouts of large firms…

Republicans also oppose the so-called Volcker rule, named for former Federal Reserve chairman Paul Volcker. The rule would put new investment restrictions on large institutions, including preventing them from owning private equity funds.

Based on the things they are opposing, it’s an easy sell to voters that Republicans are taking their orders from Wall Street. Hernando de Soto, considered by David Frum (a conservative) to be “one of our greatest free-market thinkers,” outlines the ideal regulations for derivatives which happen to be included in the bill:

– All documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries. It is only by recording and continually updating such factual knowledge that we can detect the kind of overly creative financial and contractual instruments that plunged us into this recession.

– The law has to take into account the “externalities” or side effects of all financial transactions according to the legal principle of erga omnes (“toward all”), which was originally developed to protect third parties from the negative consequences of secret deals carried out by aristocracies accountable to no one but themselves.

– Every financial deal must be firmly tethered to the real performance of the asset from which it originated. By aligning debts to assets, we can create simple and understandable benchmarks for quickly detecting whether a financial transaction has been created to help production or to bet on the performance of distant “underlying assets.”

– Governments should never forget that production always takes priority over finance. As Adam Smith and Karl Marx both recognized, finance supports wealth creation, but in itself creates no value.

– Governments can encourage assets to be leveraged, transformed, combined, recombined and repackaged into any number of tranches, provided the process intends to improve the value of the original asset. This has been the rule for awarding property since the beginning of time.

– Governments can no longer tolerate the use of opaque and confusing language in drafting financial instruments. Clarity and precision are indispensable for the creation of credit and capital through paper. Western politicians must not forget what their greatest thinkers have been saying for centuries: All obligations and commitments that stick are derived from words recorded on paper with great precision.

Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. “Let the market do its work” has come to mean, “let the shadow economy do its work.” But modern markets only work if the paper is reliable.

Moreover, the consumer protection agency to be created by the bill will be necessary to stem predatory lending. This kind of lending ultimately led to unqualified people or businesses getting loans which ended up being a cause of the recent financial crisis.

In a surprise twist, Democrats were shocked on Monday evening when Sen. Ben Nelson (D-Neb.) did an abrupt about-face and became the only Democrat to help filibuster legislation to revamp Wall Street regulations.

The removal of a provision that would have dramatically benefited financial tycoon and Nebraska native Warren Buffett, it was said, played a role in the Senator’s flip.

“He was on board until today and the only thing that changed was the removal of that provision,” said one Democratic aide, who definitively said Nelson changed his vote because the Buffett carveout was removed.

Nelson did not address the language change when talking to reporters immediately after the vote, in which the legislation was stalled, 57 to 41, with 57 senators voting to proceed. Instead, Nelson merely towed the GOP line saying he was worried the “legislation will adversely impact Main Street when the focus needs to be on Wall Street. … I don’t think everyone is aware of the unintended consequences.”

But make no mistake, Main Street was the farthest thing from his mind. Earlier in the day, Senate negotiators agreed to remove a provision that Nelson had inserted last week, which would have exempted any existing derivatives contracts from being subjected to new capital requirements. That provision had been pushed by Buffett’s Berkshire Hathaway Inc., which has $63 billion in existing derivatives contracts and would have to set aside $8 billion to cover potential losses on those contracts if the legislation were to pass.

Looking out for the little guy indeed -_-.

In the end, those pesky little derivatives that brought us to the brink of financial collapse in the first place could be the central battleground of this piece of legislation.

Matt Viser of the Boston Globe further specifies whats in the bill:

The bill also aims to crack-down on a complex financial tool called derivatives. The trading of derivatives would have to be done on an open market, and some firms would be unable to continue their current operations.

Just days before the Senate was due to vote to start working on Democrats’ legislation, Sen. Olympia Snowe said that strong derivatives regulation goes to the heart of an effective financial reform bill.

“If we are to effectively regulate the derivatives market, we must start the Senate floor debate with the strongest proposal we can craft and defend against the inevitable attempts to weaken it,” Snowe told Senate Majority Leader Harry Reid in a letter dated Friday.

Yet sadly, when it came to cast the vote to allow the debate on financial reform to precede Ms. Snowe (and a couple of her colleagues) seemed to suddenly develop short-term memory loss a la one Leonard Selby.

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