The Senate reform bill is much kinder to Wall Street than it deserves.

Commentary about business and finance.
May 21 2010 9:42 AM

Stop Complaining, Wall Street

The Senate reform bill is much kinder to the finance industry than it deserves.

Sen. Chris Dodd. Click image to expand.
Senate Banking Committee Chairman Christopher Dodd 

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.

Advertisement

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.

Like Slate on Facebook. Follow us on Twitter.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

TODAY IN SLATE

Justice Ginsburg’s Crucial Dissent in the Texas Voter ID Case

Even When They Go to College, the Poor Sometimes Stay Poor

Here’s Just How Far a Southern Woman May Have to Drive to Get an Abortion

The Most Ingenious Teaching Device Ever Invented

Marvel’s Civil War Is a Far-Right Paranoid Fantasy

It’s also a mess. Can the movies do better?

Behold

Sprawl, Decadence, and Environmental Ruin in Nevada

Space: The Next Generation

An All-Female Mission to Mars

As a NASA guinea pig, I verified that women would be cheaper to launch than men.

Watching Netflix in Bed. Hanging Bananas. Is There Anything These Hooks Can’t Solve?

The Procedural Rule That Could Prevent Gay Marriage From Reaching SCOTUS Again

  News & Politics
Politics
Oct. 20 2014 3:53 PM Smash and Grab Will competitive Senate contests in Kansas and South Dakota lead to more late-breaking races in future elections?
  Business
Moneybox
Oct. 20 2014 5:39 PM Whole Foods Desperately Wants Customers to Feel Warm and Fuzzy Again
  Life
Outward
Oct. 20 2014 3:16 PM The Catholic Church Is Changing, and Celibate Gays Are Leading the Way
  Double X
The XX Factor
Oct. 20 2014 1:10 PM Women Are Still Losing Jobs for Getting Pregnant
  Slate Plus
Tv Club
Oct. 20 2014 7:15 AM The Slate Doctor Who Podcast: Episode 9 A spoiler-filled discussion of "Flatline."
  Arts
Brow Beat
Oct. 20 2014 5:03 PM Marcel the Shell Is Back and as Endearing as Ever
  Technology
Future Tense
Oct. 20 2014 4:59 PM Canadian Town Cancels Outdoor Halloween Because Polar Bears
  Health & Science
Medical Examiner
Oct. 20 2014 11:46 AM Is Anybody Watching My Do-Gooding? The difference between being a hero and being an altruist.
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.