FINREG was signed into law by the President this week.                 
 
I’m sorry to say that FINREG recommends changes to 12b-1 fees that amount to nothing and offer no further protection of investors from this rip-off fee. 12b-1 fees are an ongoing charge by mutual funds to individual investors and are effectively an annuity payment to stock brokers for doing nothing. 12b-1 fees peaked at $13B in 2007 and have since slid to the $10B range this year. The fee should have been killed in FINREG because it’s an indefensible rip off. Instead, we’re looking at a proposed cap on the fee after what will be many years in most cases.  

 
Elsewhere in FINREG, there are new and improved underwriting standards for home mortgages that look a great deal like what we used to see before the housing bubble. Naturally a higher lending standard that reduces risk is a good thing for the bank system. But it won’t help the economy in the near term since there’s a shortage of qualified buyers because the personal balance sheet of Americans has taken a beating in the past 3 years.
 
FINREG also has a provision for a panel to be set up to manage orderly wind-downs of large banks. This is designed to preclude situations like the AIG bailout, or a Lehman bankruptcy.  In theory, this should be a good idea, but I have doubts about how this will work in practice.  
 
The bill has a Consumer Protection Agency provision. Again, in theory I think an agency that’s focused on protecting consumers -and by extension individual investors  - is a good thing. That said, I’d like to see cutting from other Federal organizations to fund the new agency, so we don’t see an expansion of government and costs. Apparently auto manufacturers have the best lobbyists because they got an exemption from the agency. So I predict that later this year, large banks will give up their bank status and become auto companies.     (my attempt at humor)    
 
FINREG also has the famous Volker Rule. This rule is intended to stop proprietary trading by Wall St banks and is named after a previous Fed Chairman — Paul Volker. Proprietary trading is where a bank makes trades for their own account. Bank ownership in hedge funds is included in proprietary trading. We ended up with a 3% cap on capital for proprietary trading as opposed to an outright ban. It’s true that 3% of a bank’s capital is not a lot, but again if a hedge fund is heavily leveraged, the losses can mount very quickly. In the end, this rule won’t change much. The big banks already have less than 3% of their capital in hedge funds. Goldman is an exception. It may have to spin-off some of its business. Then again, it could avoid the restriction if it walked away from being a bank holding company and therein the implicit support of the Federal Government. Banks have 2 years to transition their business to be compliant.
 
FINREG touches the $600T derivatives business as well. Wall St Banks will be forced to spin off their derivatives business to separate companies. In addition, derivatives trades will eventually happen on exchanges where there will be better oversight, and improved transparency. This will offer some level of protection for taxpayers since these new separate companies will not be back-stopped or bailed out if they make bets that go bad.  Wall St banks will be allowed to keep some derivatives business in-house in order to hedge their own risk. On the whole, the new provision helps reduce systemic risk, but it does not eliminate it.  It also removes a previous profit center for Wall St banks. Of course, I’m very comfortable with this since all I want from big banks is transparency and boringness. I don’t want exciting banks that are highly leveraged and use clever and deceptive accounting tricks. We tried that already and it ended badly.  
 
Wrapping up the FINREG discussion, let me also point out that fixing Fanny & Freddie was conspicuously absent. I doubt these new financial regs will stop another financial crisis, but they’ll probably make one less likely. On balance, FINREG is good for investors and the public in general. It reduces some of the financial system’s risk. But there are a pile of issues still left unchecked. So we’ll see another financial system crisis at some point. We always have and apparently always will.