The wrong reform bill

In Washington, the 2,300-page regulatory blueprint ready for approval in the Senate, looks very different than it does from Main Street or Wall Street.

Banks may be planning to move money around and spin off part of their swap desk derivative operations, but in Washington, several agencies will be looking to hire, including a Consumer Financial Protection Bureau that will be starting from scratch and the Office of Financial Education, also a creation born of the chaos of the recent financial meltdown. Concurrently, the Office of Thrift Supervision will be closing its doors officially and merging operations with the Office of the Comptroller of the Currency. The Federal Deposit Insurance Corp., meanwhile, will be branching out, as the bill requires the agency to handle giant insurance companies and behemoths of the banking world if they come close to collapsing.

"As soon as the bill becomes law, we will be moving to hire additional staff with expertise in investment banking, broker dealers and the insurance business because a lot of the affiliated activity in these larger financial organizations involves that," The Washington Post quoted FDIC Director Sheila Bair as saying.

Verily, bank lobbyists might get a day off or two. Regulators, however, are gearing up for a massive transition that will transform the regulatory landscape physically as well as legally.

That said, it may be a good season to own a moving company or a computer sales firm in the capital.

All this depends, of course, on at least three Republican votes, that have apparently been lined up, setting the bill up for a Senate vote Thursday, as Republican Sens. Scott Brown of Massachusetts and Olympia Snowe and Susan Collins of Maine have said they would support the bill, giving it the bare minimum of bipartisanship necessary for passage.

The historic bill, the most sweeping financial package in decades, is not backed by the mandate of cooperation that put it into motion two years ago. At that point -- say, late 2008 -- there was hardly an elected official anywhere that wasn't calling for some response to the financial crisis. In the Senate, where differences are naturally magnified, one day before the deal is done, it is time to ask, what went wrong?

The bill is certainly a classic example of populist versus show-me politics with an emotional peak a year ago, when President Barack Obama berated the "fat cat bankers" on Wall Street he said he was not elected to babysit. It has been, you might say, all downhill from there.

The key, many Republicans now say, is that the bill does little to reorder the root cause of the financial crisis, which was a bubble in the housing market that caused the subprime mortgage business to collapse, putting enough stress on the financial system to bring down banking giants, such as Lehman Brothers and Bear Stearns and sending millions to the unemployment line as credit all but dried up across the board.

This is where sound bites can steer you wrong. In the first place, a bill that says "no more bailouts are possible" inherently steers banks away from substandard lending practices. Lehman Brothers, in this case, is gone. In theory, the next time around, American International Group would also be unwound, and not with cataclysmic results, either -- the proof being that AIG is, at this point, unwinding major assets on the open market, taking its lumps here and there and managing, at a snail's pace, what liquidation would also do, which is to separate the good assets from the bad. The next time around, AIG would be unwound faster and the prices for its assets would be cheaper. Its shareholders and its creditors would lose. In theory, taxpayers would not.

The bill also makes it more expensive for banks to issue no-tell loans -- lending done with little or no documentation on the borrower's ability to make payments.

That safeguard relegates no-tell lending to uber-wealthy borrowers -- those that make millions on a hit record, for example, but can document little or not consistency in their incomes. That seems fair enough.

The bottom line is that the bill does not regulate the market to the point that no more bubbles are possible. The sound bite that says the last financial crisis is behind us is as irresponsible as the one that says this reform bill misses the point.

In international markets Wednesday, the Nikkei 225 index in Japan rose 2.71 percent, while the Shanghai composite index in China added 0.82 percent. The Hang Seng index in Hong Kong rose 0.64 percent, while the Sensex in India fell 0.27 percent.

In Australia, the S&P/ASX 200 rose 1.88 percent.

In midday trading in Europe, the FTSE 100 index in Britain shed 0.74 percent, while the DAX 30 in Germany lost 0.42 percent. The CAC 40 in France lost 0.67 percent, while the pan-European DJ Stoxx 50 dropped 0.74 percent.