Bye, Bye Miss American Pie

Don McLean's folk song "American Pie" comes to mind this morning while reading through Chris Dodd's financial reform package. The proposal is a shameful sellout to the American big banker, shorting the hopes of the American worker. Bye, bye Miss American Pie.

Democrat Senator Chris Dodd recently released his 1300 page proposal coupled with an 11-page summary, the content of which claims to "restore responsibility" on Wall Street. Folks, I'm sorry, but I'm going to have to use a word that I keep finding myself coming back to over and over again in the middle of this economic crisis -- it's bullshit. Dodd's bill is a big pile of bullshit.

It is curious that in the midst of Dodd's unveiling of the financial reform bill, and even as Tim Geithner made a *veiled* forceful call for Congress to act quickly on financial reform, that Wall Street has responded so positively in market action during the month of March. There is a reason for Wall Street's glee. The bulls are on parade because Wall Street owns Washington.

The longer Dodd and Company keep working on the financial reform bill, the more watered down the damn bill becomes. There is much I do not like about his latest proposal. The biggest gaffe is its handling of the hedge funds operating inside America's banking institutions.

For some time now, I've been talking about the necessity of the Volcker Rule to put an end to banks from operating hedge funds and engaging in over-leveraged bets on risky securities. This activity was the primary reason for the TARP emergency bill of 2008 that was used to bailout failed bets made by Wall Street bankers. The Volcker Rule is endorsed by Warren Buffett, Charlie Munger, many European leaders, and five former heads of the Federal Reserve. [Read Charlie Munger's "Basically, It's Over" for what will happen from failure to pass the Volcker Rule]. The bankers opposed the Volcker Rule from the outset because it would signal an end of the profit boom they have experienced over the past 10 years since the repeal of the Glass-Steagall Act.

What the latest Dodd proposal does with the Volcker Rule is put the idea on a shelf of more ideas to be researched further by the Federal Reserve. Because Congress doesn't have the balls to stand up to greasy big dollar donors on Wall Street, it now looks like it will not enact plain language statutory prohibitions of dangerous derivatives trading. Instead, under Dodd, Congress is looking to make a pass and dish it over to the Federal Reserve to deal with the issue. Yeah, the Feds will "deal" with the issue like pro sports deals with steroids. What is the Federal Reserve going to do with the Volcker Rule? It will spend a year or so on so-called research, shaped largely from skewed data offered by bank lobbyists, and in the end it will propose what it calls the "Volcker Rule," but in actuality is nothing at all like it. It will be a wolf in sheep's clothing and a thief in the night. [The Volcker Rule calls for a total ban on hedge fund operations within banks, and further calls for a regulated derivatives market to oversee independent hedge fund operations].

Under the Volcker Rule subheading of Dodd's report, it reads, "Regulations will be developed after a study by the Financial Stability Oversight Council and based on their recommendations."

Basically, it's game over.

Dodd is basically giving bankers all over the country and in every Congressional district in the U.S., a free-license over the next year to ramp up hiring in their respective hedge funds, err I mean, investment divisions. [Bloomberg.com recently reported Citigroup, for instance, is on a hiring spree in its hedge fund operation]. And in each District, bankers will make the case to the politicians running for elected office in November that these highly-leveraged securities investments are necessary to keep pace with financial innovation overseas. They are selling the same story overseas in reference to bankers in America. In the end, it will be the continued proliferation of the derivative nuclear weapons that dropped one bomb in 2008, but with an unlimited arsenal remaining, will ultimately be the destroyer of global capitalism.

Hope is quickly fading on the prospects of the Volcker Rule. I see only two prospects remaining: (1) Buffett and Munger come out and make another press blitz much as they did at the height of the crisis in October 2008, and argue strongly for the Volcker Rule, or (2) European lawmakers beat American lawmakers to the punch, and pass the Volcker Rule in the EU before Washington dummies are able to pass Dodd's poop on paper. As to the first, Munger has already made his pitch in "Basically, It's Over," and Buffett did the same in his annual letter to Berkshire investors -- no one in Washington appears to be listening. As to the second, Tim Geithner issued a warning over the weekend to U.S. lawmakers that Washington needs to act quickly on financial reform, lest the U.S. loses the advantage of setting the initiative before the Europeans do. In a nutshell, what little Timmy is saying is, "Hurry, pass Dodd's bill that maintains the status quo" so that European banks will win the argument against European lawmakers who are calling for the Volcker Rule; if European banks can show that a Volcker Rule in the EU will put EU's financial industry at a strategic disadvantage to its U.S. counterpart, European lawmakers will have no choice but to bow to the bankers.

The bulls are on parade on Wall Street, and Main Street keeps getting trampled.

Bullshit.

Peace

Jeremy