It’s 5:30am. Do you know where your Congressmen and Senators are? I’ll tell you where some of them were this morning. The joint committee to resolve the differences between the House and Senate versions of the financial reform bill reached an agreement. A 2,000 page package will be the largest legislative initiative on America’s financial system since the New Deal. The problem is, it had a visit to the dentist and all of the few teeth the House and Senate versions had in them were either yanked out or ground down to the gums. Wall Street is breathing easier now.

The basics of the bill are this, if you want to be in the banking business, either be very small or very large. Once again, we get a massive monster that even Senator Chris Dodd admits we won’t know everything that’s in it until it passes, echoing Nancy Pelosi on the health care bill. One of the things not in the bill is the Volcker Rule. Investment banks will be able to run or support hedge and equity funds. They will be able to invest in up to 3% of their assets in derivatives and other speculative investments.

As to the some $400 Billion in toxic assets held by Fannie Mae and Freddie Mac, that we know of, the banks will be forced to set up a fund to cover them. But they’ll get to spread the losses out over the next ten years. So fees and rates will increase on consumers, but the effect will be mild, like tossing a frog in a lukewarm pot of oil.

The Bureau of Consumer Financial Protection is included which will regulate mortgages, credit cards and the ever-growing cash-now/payday loan industries. However, the details of just how these industries will be regulated are yet to be determined. As usual, the Congress is only setting up a framework and leaving such details to bureaucrats to resolve years later.

Likewise, on the subject of credit rating agencies, which had given AAA investment status to the toxic and subprime loan instruments, including those exotic derivatives like Collateral Debt Obligations and Credit Fault Swaps, no specific reforms or rules are established. Only provisions to begin a two-year study group to review the practices of these agencies and then determine how best to structure them. Again, Congress is acting like the Detroit Lions football team, One-Two-Three-Punt.

As fro the banking industry itself, they will be more carefully scrutinized by the FDIC and a Financial Stability Oversight Council run out of the Federal Reserve. Banks with assets over $50 Billion dollars will play by one set of rules. Banks with assets between $15 Billion and $50 Billion dollars another set of rules, which, in some respects, are actually more punitive. The larger Wall Street banks will have the resources and ability to adjust much easier. But the mid-sized Regional banks will find themselves between a rock and a hard place. The options will be grow or die. Smaller community banks with less than $15 Billion dollars in assets will still be primarily regulated on the state level.

About the only good things I can find so far in the 2,000 page compromise financial reform bill is that the GAO will be able to do an audit of the Federal Reserve. However, the language is watered down from the original House bill, and amendment pushed by Congressman Ron Paul (R-TX). That amendment required an annual audit of the Fed. Another item is that provisions to create a bailout fund have been scuttled. While Democrats advocated that creating such a fund, to be paid for by the banking industry itself, would protect taxpayers, this aspect of the bill would have instilled a permanent culture of bailouts. Eliminating ‘moral hazard’ from business. As we now face unsustainable debts and budget deficits, Congress may be reluctant to keep alive the concept of Too-Big-To-Fail.