Dodd wants regulators to set debt limits on systemically risky companies that aren’t banks. But, the bill says, “the rules … shall not apply” for proprietary trades in federal, mortgage-agency, or state and local government debt.
The same principle holds for securitization. The bill would require underwriters to retain risk in the debt-backed securities they sell. But it offers “a total or partial exemption of any securitization, as may be appropriate in the public interest” (hint: mortgages).
The pols want “financial stability,” then, but only if it doesn’t affect the capacity of government -- and favored constituencies like homeowners -- to borrow profligately and cheaply. To ensure institutional demand for its debt and for the debt of cash-strapped cities, states, and homeowners, Washington would disproportionately encourage banks and other institutions to use such debt as trading-profit fodder.
Ironically, these exemptions would add to systemic risk. Trading in government and mortgage securities is tricky, especially if interest rates become volatile. Trading exclusively in such securities – since the feds would have made other investments either off-limits or more expensive – is even riskier.
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