The Senate's passage Thursday night of extensive financial reform is being portrayed as a big loss for the financial sector. "No End to Banks' Capitol Punishment," reads the headline in the Wall Street Journal. But everything's relative. Wall Street wanted no reform at all. And this bill seems like harsh punishment only because the default situation for the last 30 years has been that the financial sector gets precisely the regulation it wants.
What may be most striking to average Americans about the bill is actually how un-punitive it is. Given what the financial sector put the nation through in the past three years, the case for strong punishment was very compelling. But while there are provisions that the financial sector doesn't like, the legislation that is now headed to a House-Senate conference is in fact relatively tame.
Consider what's not in the bill. Earlier this year, President Obama came out in favor of the Volcker rule, which would have prohibited regulated banks from engaging in the enormously profitable (but risky) business of proprietary trading. That would have punished the large investment banks. But the Volcker rule is not part of this legislation.
There's been discussion of a Tobin tax, the idea of levying a tax on financial transactions such as currency, stock, and derivative trades. That would raise revenue and provide disincentives for the socially useless algorithmic trading that creates risk for all investors. That would have punished many financial institutions. But the Tobin tax is not part of the legislation.
The House version of financial reform called for a $150 billion fund to be raised, largely by taxing big financial institutions, that would help wind down failed institutions. That would have exacted a significant (and, to my mind, justified) cost on big investment banks. But that fund is not part of the Senate legislation. (And if health care reform is any guide, the dynamics of Capitol Hill suggest that most House-Senate disputes are likely to be resolved in favor of the Senate.)
Some of Wall Street's most absurd prerogatives and loopholes are left untouched. This bill doesn't address carried interest, the absurd state of affairs under which private equity and hedge funds get to pay capital-gains tax rates on profits they make managing money for other people.
There are some areas in which the Senate is harsher than the House. The Senate bill would, as the New York Times reports, "force big banks to spin off some of their most lucrative business into separate subsidiaries." And the legislation would push most derivatives trading onto exchanges, a move that would bite into the existing profits of some financial firms. (It's difficult to see how greater transparency and liquidity in a massive market hurts the industry as a whole)
Of course, oversight and regulation are always seen by negatives by the industry. But as I've argued, the financial services industry frequently doesn't know what's best for it. The bill that's emerging doesn't tax trading, doesn't force the industry to fund its own recklessness in advance, preserves vital tax breaks, and puts consumer protection under the auspices of the Federal Reserve, a generally conservative institution. Punishment? More like a slap on the wrist.