Bank reform: Fake it 'til you make it

    World Cup soccer fans have become used to player theatrics, where a player who is so much as touched by a rival will immediately hit the turf and writhe around in the throes of completely manufactured agony, hoping to delay their usually inevitable loss.

    Giant banks, it turns out, like to do the same thing when it comes to financial reform. Oh, their aching balance sheets! It's quite the show of theatrics, which has most of the public groaning but has been quite convincing to the eyes of Congressional referees.

    In the eleventh hour, financial reform became more like financial delay. The Dodd-Frank bill may be over 2,000 pages, and much of them, it seems, are devoted to dumping major decisions in the lap of the SEC, commissioning unnecessary studies, or otherwise creating more homework for regulators in the future.

    As Keefe Bruyette & Woods analyst Robert Lee said in a note this week, the true scope of financial reform is hard to understand because there are so many delays to its implementation.

    The problem is that banks have only one real point of leverage: That much of the American economy still depends on debt, and banks are the primary institutions that can still extend credit. So the banks have successfully argued over two years that any reform -- ranging from credit-card overhauls to the Dodd-Frank bill -- would prevent them from lending.

    At this point, that argument is looking a bit rich. Even with TARP, TALF, Federal Reserve buying troubled securities and other initiatives to make life easier for the banks, bank lending has not improved one iota, as CNNMoney's David Ellis noted. As Northern Trust recently noted, there have been five consecutive quarters of credit contraction since 2008 -- compared with zero quarters of contraction in the previous 58 years.

    If banks aren't lending, it's most likely because they are still afraid of the crisis -- so it is more than a little intellectually dishonest of them to pretend that it is regulation that sent them to the floor. If anything, it is regulators who have saved the banks: Treasury and the Federal Reserve have given banks the shirts -- or rather, the dollars -- off their backs.

    In the U.S., much of the Dodd-Frank bill (should it ever pass) wimps out and pushes many of its most important decisions until later, and in some cases leaves rule-making loopholes that could allow banks to delay major changes until 2022. The Volcker rule, for instance, which separates banks from their private equity and hedge fund arms, could take more than six years to go into effect, according to KBW's Lee. No wonder Citi (C) stocked up on PE investments before financial reform took shape. (For some, even that is too soon).

    Or consider the Lincoln amendment to Dodd-Frank, which would require banks to create new subsidiaries to trade equity derivatives, commodities and credit default swaps off exchanges. (Banks will be allowed to keep other kinds of swaps trading, including interest rates and currencies, in-house.) The banks have up to two years to comply -- which would put implementation right smack in the center of another election year.

    Another victim of delay tactics is the expansion of "fiduciary duty" to include stockbrokers and insurance agents. First, Congress says, the SEC must make a six-month study and then suggest solutions, which then will be open to debate.

    Yet another languid approach is taken in the Collins amendment, which prevents big banks from using a type of security known as trust preferreds to boost their capital levels. Banks have a full five years to comply with that; see you in 2015.

    That's all fine, but it pays to ask why we are passing a financial reform bill now if we have exactly none of the answers, but still use over 2,000 pages to express our national ignorance of any solutions. If Congress couldn't figure out real financial reform in two years of the crisis -- and all that money spent by lobbyists -- why does it believe it can do it later? Will there be a divine revelation?

    It's the same tale globally, where the G-20 just pulled in the reins on an important set of pending, strict international bank rules called Basel III, which were supposed to take effect in 2012 but, like U.S. rules, could well take a decade longer than that.

    The Basel III requirements are the most important reforms facing banks, because they're the only ones with any teeth. These strict rules, which have raised the ire of bankers, would force banks to hold higher-quality assets and to finance themselves with hybrid securities, which have longer maturities and won't be as subject to a bank run as the current short-term financing that banks use to stay alive. Basel III was supposed to go into effect in 2012, but the recent G-20 meeting in Toronto made the reality a lot more vague. The Basel III reforms might happen someday, but they are likely to be watered down by then.

    The problem with the delays is that many of these reforms are designed to make banks strong enough to bring a halt to the recession that exists ... right about now. We sure could use them.