The Financial Reform Legislation

Having been involved at the edges of the financial reform legislation for the past few weeks, a few observations to date:

• Warren Buffett apparently supports derivative regulation, so long as it does not apply to him. "Me too" say Goldman, JP Morgan, Morgan Stanley, several dozen hedge funds, GM, Union Pacific, . . .:
• ISDA and friends have a new argument for why derivatives should get special treatment under the Bankruptcy Code:  collateral.  "If regulators want everyone to use collateral to back up derivative trades, we need special treatment."  Why they can't be treated like every other secured creditor under the Code remains unexplained.
• Another argument in favor of retaining special treatment, even made by those who work for the financial regulators, is that the move to central clearing requires special treatment. Unaddressed is the problem that many derivatives are still not centrally cleared, and won't be for a long time. And I worry that without the incentives that come from facing real bankruptcy risk, central clearing authorities will become little more than a kind of Central Services, routing paper (or electrons) between the relevant parties, and not performing the kind of counterparty risk assessment that clearing is supposed to bring.