After a 20-hour all-nighter, the House/Senate conference committee struck an early morning deal on financial reform, setting up a final vote next week.

Why all the inverted commas? Well, there is much in the bill that has nothing to do with ‘Wall Street’ or the root causes of the crisis (i.e. debit card and interchange fee rules); there is little in it that will ‘reform’ too big to fail or change the incentives for the kind of behavior that led to the crisis (implicit subsidies and bailout authority galore); and it was a ‘compromise’ mostly between Democrats.

From WaPo:

A new consumer protection bureau housed in the Federal Reserve would have independent funding, an independent leader and near-total autonomy to write and enforce rules. The government would have broad new powers to seize and wind down large, failing financial firms and to oversee the $600-trillion derivatives market. In addition, a council of regulators, headed by the Treasury secretary, would monitor the financial landscape for potential systemic risks.
“The finish line is in sight. The bill that has emerged from conference is strong,” Treasury Secretary Timothy F. Geithner said in a statement early Friday. “It will offer families the protections they deserve, help safeguard their financial security and give the businesses of American access to the credit they need to expand and innovate.”
On the House side, the final tally was 20 to 11 to approve the conference committee’s report. On the Senate side, it was 7 to 5. The votes fell along party lines, earning no support from Republicans on the two panels.

Why didn’t Republicans support the measure? Sen. Judd Gregg (R., N.H.) sums it up:

“This legislation is a failure on both counts,” Sen. Judd Gregg (R-NH) said in a statement that denounced the compromise as failing to address “shoddy underwriting practices” or problems with the government-sponsored entities Fannie Mae and Freddie Mac. “It will not encourage much-needed stability and confidence in our financial markets. It will not significantly reduce systemic risk in our financial sector.”

The conference report supposedly contains a weakened Volcker Rule and thoroughly-gutted derivatives language. Under that compromise, financial houses could continue interest rate, currency, gold and silver derivatives trading, as well as to hold derivatives that offset balance sheet risk. They are still required to “spin off only their riskiest derivatives trades, including particular forms of credit-default swaps, which are complex financial bets that exacerbated the financial crisis.”

Prediction: if you thought financial instruments were complex before, wait until you get a load of the vehicles Wall Street will construct to get around these rules.

In addition, banks will have two years to spin-off their derivatives trading, and can retain the operations under independently capitalized affiliates. This latter might do some good if it keeps the riskiest products off the balance sheets of the biggest banks — effectively creating a good bank / bad bank situation in advance, instead of trying to do it on a sinking ship, as Lehman tried in September of 2008.

More on the bill as it becomes clearer, to be sure. But a parting thought from outgoing Sen. Chris Dodd (D., Conn.), a sequel to Nancy Pelosi’s “pass the bill to find out what’s in it.”

“It’s a great moment. I’m proud to have been here,” said a teary-eyed Sen. Christopher J. Dodd (D-Conn.), who as chairman of the Senate Banking Committee led the effort in the Senate. “No one will know until this is actually in place how it works. But we believe we’ve done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done.”

Indeed.