While the Senate and House have debated the health care reform endlessly, fighting tooth and nail at every step, all the while being broadcast on network television, the financial reform bill is quietly moving along under the radar. On the same day that Senator Dodd proposed his sweeping reform bill, it passed committee.

“The bill that finally passes on the floor will be a much more business-friendly bill,” Miller said today. “They won’t get a bill done until Dodd and Shelby agree on the compromise, but Republicans do want to get a bill done this year. So there’s incentive for both sides to come to agreement.”

The fact that the bill is going to be watered down even more is a sad statement to an on-going tragedy.

Last week Moody's rating agency released its review of the pre-compromised financial reform bill. The report, which didn't get much coverage, contained an extremely damning observation.

We observe, however, that the current regulatory regime is already authorized to protect the soundness of banks and the financial system as a whole. In addition, the current banking laws give bank regulators the power to have banks cease and desist from activities and require banks to have higher capital ratios. Thus, we believe the benefits of a revamped regulatory regime will depend more on how regulators implement and execute the law - rather than depend on the words of the law itself - because the proposed regulatory framework doesn't appear to be significantly different from than what exists today.

So the "most sweeping overhaul of the financial system since the Great Depression" is actually more like tinkering with the existing system. There is nothing bold in this bill. There is nothing there that would upset the financial elite of the status quo.
In fact, FDIC Chairperson Sheila Bair has stated that the Dodd bill leaves the door open to "backdoor bailouts". Some economists have pointed out that the resolution fund is far too small, and would "practically guarantees that there will be a permanent bailout situation or a permanent TARP program."
The reform bill has been watered down to such an extent that even Timothy Geithner is warning against watering it down further. He's afraid that the rest of the world will begin moving forward without America when it comes to global financial reforms.

The bill focuses on giving the regulators more power, but power was never the problem. The regulators already had enough power to do their jobs. The problem was incentives, and that won't be getting changed.

William K. Black, the man who ran the S&L cleanup, has a damning verdict of the regulators during the bailout.

Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.
Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth.

Black goes onto say that ”the entire strategy is to keep people from getting the facts”.

Given the limited scope of the financial reform, we must rely on the regulators, and as Alan Greenspan said just a few days ago, the regulators failed.

"Even with the breakdown of private risk-management, the financial system would have held together had the second bulwark against crisis -- our regulatory system - functioned effectively," Greenspan said in the text of a speech at a Brookings Institution conference today. "But, under crisis pressure, it too failed."

Greenspan went on to admit that the regulators at the Federal Reserve failed to understand the extent of the housing bubble and its ramifications.

With no real legislative overhaul of the financial system, the weight of this bill falls on the regulators who completely failed us over the past decade. Republicans in opposition of this watered-down bill have said that the regulators have "learned from their mistakes" and from now on will "protect consumers from bad mortgages and fraudulent schemes in the future". This sentiment seems so naive that one can't be blamed for believing their opinion comes from a very cynical place.

Paul Volcker strongly disagreed with that feeling this past week.

"In my opinion, it's very unlikely that the regulators and supervisors would evoke a strict prohibition until a crisis came and then it's too late," Volcker said. "That's why you want it in legislation."
"Look, I've been a regulator for 20 years," Volcker emphasized. "So I know how they are."

The most powerful element of the Dodd bill is called the Volcker Rule. That rule is now in trouble of being completely neutralized.

As it stands, Dodd's bill already includes a weaker version of the Volcker Rule. The original rule would ban banks from proprietary trading or investing in hedge funds and private equity funds.
Dodd's Volcker rule would ban banks from prop trading at some point in the future.
Now Dodd's committee is gathering to weigh watering the Volcker rule down even more. They will consider a number of amendments, one of which is whether or not to change the word "shall" [implement in the future] to the word "may" [implement in the future].

What has become increasingly obvious is that the regulators, instead of protecting the public, were more interested in protecting the banks they were supposed to regulate. This includes the Federal Reserve breaking the law to do so.

The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a "warehouse" for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.
"The Fed legally is forbidden from taking such assets. There's a legal requirement that the Fed's assets be investment grade," Rep. Alan Grayson (D-Fla.) told HuffPost.

Let's put that into perspective for a moment: the nation's chief financial regulator, the Treasury Secretary, broke the law while leading the Federal Reserve, by making the American public "the sucker of last resort" for junk assets that the banks wanted to off-load. Now he is warning Congress not to water down the financial reform bill any more because it will lose all credibility to the rest of the world.
It gives you an idea of just how gutted this financial reform bill really is.

A watered-down bill might be worse than no reform bill at all. Paul Krugman says that false reform creates a false sense of security.
The banks are already beginning to take on the same levels of risk that they did before the crisis hit. If you combine the risk with the implied government bailout, widespread insolvency in the banking industry, and a new false sense of security by investors, you wind up with an accident waiting to happen.

Regarding elephants in the room

While there will be a lot of debate about the strengths and weaknesses of the financial reform, I can't help but notice there is something missing. An issue so large and obvious that it is hard to see simply because it is the dominant feature of the landscape.
This item I am talking about is the real estate market.

You might recall that this global financial crisis was caused by the collapse of a real estate bubble. Yet, this financial reform bill does almost nothing to address this critical sector of the financial economy.
Doesn't that seem odd?

Instead of reforming the real estate market, Washington is doing everything in its power to re-inflate the bubble that almost caused the global financial system to completely fail in 2008. These efforts, at great cost, have had limited benefits.

(Reuters) - The United States has thrown trillions of dollars at the slumping housing market and it still looks wobbly.
The government seized the two biggest mortgage finance companies and offered as much as $8,000 in tax breaks to entice home buyers, while the Federal Reserve has bought more than $1 trillion in mortgage-related assets as a way to drive down borrowing costs....
As poorly as the housing market has performed so far this year, some economists think it may soon get worse. The tax credit, which was expanded and extended late last year, expires in April, the Fed is wrapping up its mortgage asset purchases by the end of this month, and millions of homeowners are behind on payments, leaving them vulnerable to foreclosure, which tends to drive down prices of neighboring homes.
Sal Guatieri, an economist with BMO Capital Markets in Toronto, said the economic recovery was grinding along instead of gaining momentum, and a "precarious" housing market was a big reason why.

The fact is that housing prices are still overvalued in many areas. Inventory is still near record highs. Foreclosures are still near record highs, and another big wave of foreclosures is approaching.
Meanwhile, the federal government continues to throw massive piles of taxpayer money at this blackhole in a futile effort to bring the economy back to a place it cannot return to. We are making the exact same mistake Japan made 15 years ago, and no one in Washington seems to notice.

The real estate bubble was caused by a toxic combination of self-deception, greed and fraud. While Washington ignores this reality, the same guys who gamed the system on the way up are now gaming the system on the way down. It's called playing both sides of the con.

So the crux of the problem is how to deal with the 7.7 million homes in foreclosure or that are 30+ days late. The HAMP program has pushed 168,000 mortgages into permanent modification but that leaves over 7.5 million mortgages in distress (and more are entering foreclosure each month). Leave it to the housing industry experts to create additional levels of fraud to siphon off money from the average American.

These con artists have found ways to extract funds from distressed, working class Americans.

Second lien holders are now demanding money "on the side" during short sales.
When I say "on the side", I mean cash, off the HUD settlement statements, so the first lien holder doesn't see it. When I say "second lien holder", I mean the banks.
The banks are basically saying, "pay us off or we won't let the short sale go through." This is extortion. This is also illegal.

Yet the regulators, that we are told have "learned from their mistakes" have been overlooking these flagrant abuses. If regulators can't be trusted at this point in time, when so much attention is being paid to them, why should they be trusted when things start cooling down? If regulators can't be trusted, as Volcker has warned us, why should we think that this financial reform bill is anything but a political circus?