The Senate Just Made a Big Mistake

Generally, I'm not inclined to write about legislation in process - meaning a bill that passes one house and has yet to make it into the other chamber for consideration.

However, it's not like me keep quiet about banking rules, especially proposed rules rolling back consumer or economic protections, or protections from bankers with dirty bomb briefcases.

So, I have to touch on the Senate bill passed on Wednesday last week - on the 10th anniversary of Bear Stearns failing, mind you - because it's the first crack in crisis-era rules that have safeguarded us since then.

There's good and bad in the Senate bill... but mostly bad.

Here's what's wrong with the Senate bill and what to watch for coming out of the House.

The TBTF Effect

The big deal about the Senate bill is it cuts the number of banks and shadow banks, which are essentially banks masquerading as financial services companies, considered "too big to fail."

Under Dodd-Frank, banks with more than $50 billion in assets are considered too big to fail (sometimes abbreviated as TBTF) and are subject to the tough regulations. One of my favorites is a yearly stress test to prove that they could survive another crisis of considerably less magnitude than the last crisis, but whatever.

The Senate legislation, shepherded by Banking Committee Chair Mike Crapo (R-Idaho), would raise that threshold to $250 billion in assets, potentially allowing several high-profile financial institutions (meaning shadow banks), including American Express Co. (NYSE: AXP) and Ally Financial Inc. (NYSE: ALLY), to escape extra regulatory scrutiny.

Additionally, the legislation would exempt banks with less than $10 billion in assets from the "Volcker rule," which bars banks from making risky wagers with their own money.

The bill also exempts smaller banks from having to divulge detailed data on whom they lend to.

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Another provision excludes banks originating fewer than 500 mortgages annually from having to report certain racial and income data on their mortgages.

I don't have a problem with banks with less than $10 billion being able to trade. After all, if they lose all their assets - that means their customers' deposits and assets, $10 billion, a total wipe-out - is manageable. Not that I'm advocating for $10 billion banks rolling dice like dogs with green shades on their heads and dice in their hands. But, the truth is, banks with those levels of assets don't trade much anyway.

Small banks having to report detailed data on loans is nothing but regulatory overload. Their loan committees should be responsible for making over-reporting and compliance with burdensome reporting rules unnecessary.

As for banks making fewer than 500 mortgages annually, who cares? There aren't enough mortgages in a pile that small to worry about. If a bank's only making 500 mortgages, it's unlikely to be a player anyway.

But here's the problem...
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This Could Be Disastrous

In a Wall Street Journal article on Thursday, Stacey Tronson, the compliance officer for Cornerstone Bank, a North Dakota bank with 14 locations, said the compliance costs for the mortgage-reporting requirements alone have led other banks in her state to exit from the mortgage lending business altogether. "No small bank can continue to weather that," she said.

The problem, however, is letting huge institutions off the "too big to fail" hook, which means they escape the hard scrutiny of the Federal Reserve and other regulators supposedly breathing down their necks.

Does anybody remember the history of Ally Financial?

Seriously, loosening up the noose around banks with more than $50 billion in assets only stretches the rope those banks have dangling behind them, which they will more than likely trip over when fewer eyes are on them.

Freeing community banks from debilitating regulatory overkill is not the same as freeing up giant institutions from prudent regulations.

The Senate's made a big mistake. Now, let's see what happens in the House.

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The post The Senate's Made a Big Mistake appeared first on Wall Street Insights & Indictments.

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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