Fin-Reg End Game

[H]ere's a brief rundown of what we'll get out of it:

* Companies selling mortage-backed securities will be required to retain a portion of the risk on their own books. The originate-to-distribute model, where dealers bundled up loans and immediately turned around and sold off the whole package, created a system where bundlers had no incentive to make sure the underlying loans were any good. This provision helps rein this in.
* Commercial banks will face restrictions on the amount of proprietary trading they can do. This is the so-called Volcker Rule, and although it was watered down in conference (banks can still trade up to 3% of their capital for their own accounts) it's still a pretty good safety valve for the banking industry.
* A Consumer Finance Protection Agency will be set up within the Federal Reserve. I was initially opposed to housing the CFPA at the Fed, but I came around to the idea based on the argument that this will allow the CFPA to offer higher salaries and attract better talent. This is a significant win, and Elizabeth Warren says she's pretty happy with it.
* Derivatives trading will largely be forced onto public exchanges. Certain standard derivatives will still be offered over-the-counter, which is too bad, but more complex instruments like credit default swaps will be made considerably safer by this rule.
* Dick Durbin's interchange regulation for debit cards was adopted. This doesn't affect the safety and soundness of the banking system, but it's a good step forward for transparency and consumer protection.
* Capital requirements for large banks will be increased. Together with the Basel III requirements currently under negotiation, this is a key step toward making the entire financial system safer and less leveraged.
* Other changes that are good, though watered down from where they ought to be, include ratings agency reform, resolution authority, systemic risk regulation, and SEC authority over hedge funds.

This doesn't go as far as it should. There should be greater constraints on leverage. The prop trading and derivatives trading regs were weakened more than they should have been. Some critics think the big banks should have been forcibly broken up.

Still, even in its weakened state, the bill is stronger than it was a few months ago and it will go a long way toward reducing the size and profitability of the banking sector — which is why the banking industry is fighting it tooth and nail.