The market sorely needs certainty about the rules various institutions will operate under so that investors and businesses can properly assess the kinds of actions they should take and the potential consequences of failure. The financial reform bill that was completely provides some certainty–a good thing-but also grants so much latitude to the the executive branch that people will still be guessing what the rules will be long after this bill becomes law. As Chairman Christopher Dodd said immediately after its passage: “No one will know until this is actually in place how it works.”

Unfortunately, this is too much of an echo of Speaker Pelosi’s statement about the health care bill: she said voters wouldn’t know what was in the bill until it had passed. On health care, in the months since the law’s approval, voters’ worst fears are being confirmed as cost estimates rise and it becomes increasingly clear that firms will have incentives to drop private insurance so that the President won’t make good on his promise that those who like their insurance will get to keep it.

Voters are likely to suffer the same rude awakening as this law is implemented. Undoubtedly some of the regulations contained in this 2,000 page bill are necessary improvements. Unfortunately, however, those positive measures are accompanied by a swelling of bureaucracy that’s likely to make the system more complicated, but not more transparent or secure. It also fails to reform so of the biggest drivers of the recent financial crisis (like Fannie Mae and Freddie Mac).

The Financial Times has a good overview of the perceived winners and losers from this legislation, and some of its most important elements:

Instead of the “formidable barrier” set up in the 1930s, present-day financial institutions – banks but also hedge funds, private equity groups, insurers and exchanges – have to navigate a maze of prohibitions and exemptions that will have different effects on different companies.
One outcome is broad and almost certain: large financial groups whose failure would put the whole system at risk will have to cut back on risk and set aside more capital than before the crisis.

Just how much capital is a question US and international regulators will have to answer in the coming months as a final agreement on new standards takes shape. “This is a big deal,” said Richard Spillenkothen, a former director of banking supervision at the Federal Reserve who is now with Deloitte?& ?Touche. “Regulators have a lot of authority to set much stricter capital standards”.
Securities houses – a sector that saw two of its members, Lehman Brothers and Bear Stearns, collapse during the turmoil – will bear the brunt of the regulatory crackdown.

As a result of the “Volcker rule”, named for its backer Paul Volcker, the former chairman of the Federal Reserve, Goldman Sachs and Morgan Stanley will have to stop trading on their own accounts and cut back on investment in hedge funds and private equity over the next five years or so. They will also have to ensure that their dealings with clients are not plagued by conflicts of interest, which could have profound implications for their business models.

Large commercial banks such as JPMorgan Chase, Citigroup and Bank of America fared better. Although a much-feared requirement to spin off some of their derivatives units remained in the legislation, it was diluted. Banks will be allowed to retain the bulk of their derivatives units – including interest rate swaps, foreign exchange instruments and investment-grade credit default swaps. Derivatives based on equities, commodities and “junk” CDSs, however, will have to be placed in a separate subsidiary with higher capital requirements, although the exact details will still need to be mapped out….

In the coming months there will be an almighty tussle as regulators – mainly the Commodity Futures Trading Commission and the Securities and Exchange Commission – devise detailed rules to flesh out and back the 2,000 pages of new laws. Those details could yet determine which groups come out on top, and also the cost of derivatives and investing.

“There is something for everyone to be focused on – no one [in financial markets] can say: it does not apply to me,” said Luke Zubrod, director at Chatham Financial, an advisory firm.

Is it appropriate that so many of the details are just left up for regulators to decide? Isn’t it supposed to be Congress’s job to actually make laws that are set to govern people?