We’ve been promised that the House and Senate financial reform bills will be reconciled in a highly transparent and thoughtful way and be wrapped up and ready for the President’s signature by Independence Day.

I’m trying to be upbeat about this.  There are, after all, substantial benefits to be obtained from certainty, and once this is done, we’ll at least have rules.  We may not like them, but at least we’ll have rules. (OK, the final Bill will probably include dozens of referrals to the regulatory community to make the actual rules, but nothing’s perfect.).  God only knows what to expect when our duly elected representatives, awash in populist outrage and with the clock ticking loudly down to election day, try their hands at making sense of these two ridiculously complicated 1,400 page bills.  Barney Frank will manage the reconciliation process.  Imagine, he has now been imbued with the hopes of the financial services community for a sensical and balanced Bill.  Man bites dog.  You can’t make this stuff up. 

Proprietary trading seems to be at the epicenter of the political firestorm now.  Does the victory of Senator Lincoln in the primary make this better or worse?  I simply don’t know.  There’s plenty to get exercised over here.  But looking at this with perhaps an untoward focus on securitization (but that’s where I make my living), I’m worried that the Senate’s version of the Bill could be interpreted as killing depository institution securitization.  That cannot be what they mean, right?

The Senate Bill contains a version of the infamous Volcker Rule.  Under the Bill, depository institutions and most bank holding company affiliates will be prohibited from engaging in proprietary trading activities.  Section 619 of the Senate bill essentially directs the applicable Federal banking agencies, through rulemaking, to prohibit proprietary trading, by depository institutions or other members of a related bank holding company.  For purposes of this missive, proprietary trading means the purchasing or acquiring of a financial instrument for the trading book. None of these key terms are defined.

So, if a covered institution makes a mortgage loan with the intention of selling it, is that acquiring a financial instrument for the trading bank?  Who knows?  Commentators have mostly focused on trading securities on the prop desk but it really isn’t written that narrowly.

Someone please tell me I’m crazy, but this worries me. Now I know no regulatory constituency should want to kill off securitization, but…  Maybe, at the end of the day, we’re better off having conversations about limiting the scope of the proprietary trading ban with the applicable banking regulators.  But, once again, the type of certainty and clarity essential for robust capital formation will escape us if we don’t get this sorted out now.

I would urge the industry to do what they can to get clarity here before the Bill goes to the President. If it doesn’t get done here, it’s off to the regulators and more months (or years) of uncertainty.  And remember, while we may be received on the Hill as villains, at least we didn’t pollute the Gulf.