IT MIGHT BE USEFUL TO ANALYZE THIS ONE THROUGH THE LENS POLITICO PROVIDED YESTERDAY:

Financial Overhaul Signals Shift on Deregulation (BINYAMIN APPELBAUM and DAVID M. HERSZENHORN, 7/16/10, NY Times)

Some pushed to break apart large banks and curtail risky kinds of trading. Others sought a grander overhaul of federal regulation. The administration’s approach, which prevailed, instead is focused on giving existing regulators additional powers in the hope that they will produce better results.

The legislation is painted in broad strokes, so like actors handed a script, those regulators have broad leeway to shape its meaning and its impact.

“This is a framework that has the potential to be as modern as the markets, but its efficacy will certainly depend upon the judgments that regulators make,” said Lawrence H. Summers, the president’s chief economic adviser.

The legislation, for example, requires many derivatives to be traded through clearinghouses, a form of insurance for the traders, and it requires traders to disclose pricing data to encourage competition. But regulators will decide which derivatives, and how long traders can wait to disclose pricing information.

The administration can shape that process through the appointment of new leaders for the various agencies. The Senate held confirmation hearings on Thursday for three nominees to the Fed’s board of governors. In addition to appointing a new consumer regulator, the president will nominate a new comptroller of the currency, responsible for regulating national banks.

The same groups that fought to shape the legislation — bankers and business groups, consumer advocates and trade unions — already have turned their attention to the rule-making process, seeking a second chance to influence outcomes. Much of the work must be completed over the next two years, but the bill sets some deadlines more than a decade from now.

Senator Christopher J. Dodd of Connecticut, who as banking committee chairman was a main architect of the legislation, said its success ultimately would depend on regulators’ performance.

So let us accept as a given that this is a huge legislative success that will transform the way the financial sector of the economy is governed. After the recent credit crisis, which was produced by the manipulation of derivatives and other instruments by this sector, this should, in theory, be a popular measure.

Now, try to come up with a matchbook cover description of why voters should be impressed by and pleased with the legislation. The story suggests that the legislation basically keeps the same regulators who oversaw the fiasco in place, but adds a bunch of new ones, and allows for many new regulations down the road, should they survive the federal rulemaking process.

No matter how well you communicate that to the electorate it is difficult to see why they should be enthused about it. What has been done is so amorphous and so prospective that it could improve things, make things worse or have no effect and the Administration is acknowledging that we won't even know what has been done for years. The only thing that's certain is the federal payroll was just expanded at a time when even Democrats are worried enough about spending to talk Social Security cuts. That's how you lose by winning.

MORE:
Financial Reform, R.I.P.: The Dodd-Frank bill does nothing to deal with Wall Street's central problem: systemic non-disclosure. (James S. Henry and Laurence Kotlikoff, 07.15.10, Forbes)

Dodd-Frank is a full-employment act for regulators that addresses everything but the root causes of the financial collapse. It serves up a dog's breakfast covering proprietary trading, consumer financial protection, derivatives trading, executive pay, credit card fees, whistle-blowers, minority inclusion and Congolese minerals. Dodd-Frank also mandates 68 new studies of carbon markets, Chinese drywalls, and person-to-person lending, and many other irrelevancies.

None of this deals with the central problem--Wall Street's ability to hide behind claims of proprietary information to facilitate the production and sale of trillions of dollars in securities whose true values are almost impossible for outsiders to determine.

This policy of "systematic non-disclosure"--the absence of complete transparency about what financial firms really owe and are owed--left only its CEOs and their top consiglieres in a position to know what their companies really owned and owed. Consequently, the valuation of Wall Street firms came down to trusting the bank's senior executives--those who often had the greatest stakes in the non-disclosure system.

About That Financial Reform 'Victory' (KIMBERLEY A. STRASSEL, 7/15/10, WSJ)

[L]ike stimulus and health care, Democrats turned the financial regulation bill into a monstrosity. What started as a promise to streamline and modernize the financial system turned into 2,300 pages of new agencies and new powers for the very authorities that fomented the financial crisis. The bill is laden with uncertainty and brimming with costly regulations on small businesses. Sen. Chris Dodd and Rep. Barney Frank made it easy for Republicans to pronounce their bill more Obama Big Government—a "Main Street takeover"—and to justify their votes against it.

Those votes were made easier by the knowledge that, like stimulus and health care, this is legislation that has overpromised. The bill does nothing to address the root causes of the crisis.

Citi Explains How It Hid Risk From the Public (MICHAEL RAPOPORT, 7/16/10, WSJ)
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In a filing made public Thursday, Citigroup explained how it made an accounting mistake that hid billions of dollars in debt from investors by misclassifying certain short-term trades as "sales" when they should have been classified as borrowings.

Citi had acknowledged in a securities filing in May that it had misclassified as much as $9.2 billion of short-term repurchase agreements, or "repos," at times over the past three years, but it had provided few details.

The disclosure highlights one of the ways banks can engage in Wall Street "window dressing." The traditional way banks have done this is by temporarily shedding debt just before reporting their finances to the public at the end of quarterly periods.

In this case, Citigroup went further by improperly booking repos as sales and not borrowings. Both types of window dressing hide from investors the true risk banks are taking on.

Though window dressing isn't illegal, intentionally masking debt to deceive investors violates regulatory guidelines.

Posted by Orrin Judd at July 16, 2010 5:30 AM