While many critics claim the financial regulation bill that emerged from Congressional negotiations on Friday will do next to nothing to reduce the chances of another banking crisis, there are some limits on risk taking that could do just that.

The one that strikes me as the toughest and most critical is the so-called Lincoln amendment, which would require banks to separately capitalize their trading in credit default swaps, which were central to the recent crisis.

Credit enhancement used to be the magic tool in securitization to minimize losses and boost the quality of collateralized debt obligations. But as the Abacus deal underwritten by Goldman Sachs has showed, such practices often led to overleveraged, overly risky transactions, which turned into losses for all parties, including banks underwriting CDOs, once the market turned against them.

"Synthetic CDOs bring together a number of different factors which ultimately resulted in catastrophic losses for all involved," said the Aite Group in a report on synthetic CDOs this week. Even underwriters, who often kept super-senior tranches on balance sheets, suffered heavy losses.

The bill that was approved yesterday by the Senate Agriculture Committee correctly would let the Commodities Futures Trading Commission defer to state laws that limit the use of derivatives for purposes of speculation.

By doing so, the bill would effectively curb so-called "naked swaps," those that aren't traded on exchanges or cleared centrally and where neither party has an insurable interest at stake, because those swaps would no longer be enforceable in court. In other words, only a party using a swap to hedge could sue to go after its counterparty's assets if it failed to hold up its end of a deal.

Reform of the financial services industry has been slow to come and it is especially true for credit ratings agencies, which have so far come out unscathed from the crisis.

But with the lawsuit against Goldman Sachs regarding the marketing of toxic collateralized debt obligations that received the blessings of ratings agencies, the complacency could soon be gone.

It seems as if Goldman Sachs' essential defense in the SEC's fraud case against the bank is that it did nothing differently than other banks typically do in failing to disclose to investors that a hedge fund that wanted to short the securities the bank sold helped design them.

But if the "everybody-does-it" line gets Goldman off the hook, then what does that say about Wall Street? Simon Johnson argues that it means that fraud is now its very basis.

New accounting rules for derivatives may lead to new bank losses, if I read this article correctly.

The new rules, which go into effect on June 15, would require owners of collateralized debt obligations that hold credit default swaps along with other assets, to mark the swaps to market. And that's led some experts to predict that investors to unwind the securities to avoid the mark-downs.

A piece today by derivatives expert Satyajit Das helps put to rest some if not all of the doubts expressed about the Volcker Rule's potential efficacy.

Much of the criticism by those who say it doesn't go far enough focuses argues  that forcing banks that get deposit insurance to shed their proprietary trading operations would not necessarily eliminate systemic risk, since taxpayers could not afford to see huge trading operations bring down the markets even if their deposits were still protected. Mister Market is just too important for that.

Ever read "Naked Came the Stranger," that 1969 hoax in which a bunch of newspaper literati got together anonymously and wrote a terrible pulp novel with gratuitous sex and betrayal as a send-up of bad popular fiction? Me either, but it was a huge hit and its writers were said to have been simultaneously sickened and enriched.

Naked credit-default swaps are also kind of sickening but clearly those who dabble in them aren't put off by the stench. The good news is that the days of naked-swap wine and roses may be numbered. The chatter about regulatory reform as it relates to the CDS market has focused these past few months on how trade in standardized contracts will likely be forced onto exchanges and clearinghouses, where counterparties will have to post collateral - a requirement that would have them actually make good on their commitments - I know, what a concept (as opposed to having Joe Taxpayer do it in order to "save the financial system from collapse" or some such (hello, AIG).