Banking Law

Reader, suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself. --- Mark Twain

Holy Cow! Stop The Presses!

At a time when the comments section to a National Public Radio "human intesrest" story about a pair of Millennials who feel entitled to walk away from their home loan not because they can't afford to pay it, but because the "investment" they made in the home isn't currently panning out the way they'd hoped, demonstrates the great moral divide between folks who think that because all banks are pure evil, two wrongs make a right, and those who think "strategic default" is a nickname of the fourth horseman of the Apocalypse, imagine how shocked we were to read that consumer advocates, banks, and bank regulators agree on anything, much less that all agree that part of the Dodd-Frank act "blows" (to use the proper legal terminology).

Banks and regulators are urging Congress to scale back a ban on the use of widely criticized credit raters to assess the risk of securities and investments on bank's books, at least until a better alternative is developed.

In a rare moment of agreement over the new U.S. financial reform law some consumer advocates say banks have a point.

[...]

The danger, they say, is that regulators will rely on otherwise untested tools when assessing the riskiness of banks.

More directly, industry officials argue banks may shy away from holding state and corporate debt because it would require too much work to prove to regulators that those investments are low risk.

The unfortunate roadblock for this consortium of critics is that the bovine bi-peds who ground out this piece of sausage came together with much bi-partisan zeal to jack, slice, dice, and julienne the credit rating agencies. Those were the same agencies that rated cow pies as caviar when it came to various forms of subprime mortgage-backed securities. They deserved a beating, and both political parties joined hands to kick them in the hind quarters. According to David Clarke of Reuters, that fact alone will make it tougher to get Congress to extend or narrow the ban on use of the agencies' ratings by banks. You understand the problem: once the herd of heifers starts stampeding in one direction it takes a heck of lot of cowboys riding very fast horses and firing very loud guns in their faces to get them to turn. Logical arguments are drowned out by all the panicked mooing.

Banks, bank regulators, and bank-bashers all agree that "over-reliance" on credit agency rating of securities proved to be a bad thing (especially since the agencies neglected to do their job). The rub is that none of these parties is certain what to use to replace those ratings. The Act leaves it up to the regulators to concoct a substitute and they're scratching their heads. Neither the banks nor any other interested party is of any help. Thus, rethinking the advisability of this particular portion of the financial reform legislation seems appropriate.

This is what you get when you pass a massive financial reform reform law of over 2300 pages in record time to prevent another financial crisis six months prior to the date when the commission that was established to determine the cause of the current crisis completes its work. The scholars at the Alfred E. Neuman School of Philosophy have worked their magic again in the hallowed halls of Congress.

As we work our way through the rest of Dodd-Frank over the coming months and years, expect hits like this one to keep on coming.