A panel sponsored by the Securities Industry and Financial Markets Association on Monday on what banks can expect from financial reform warned that higher capital reserves and other limits Congress imposes on their profitability would hurt the economy as they curbed their ability to lend.

Several panelists, including Adam Gilbert, head of regulatory policy in the corporate risk management group of JP Morgan Chase, and Gary Mandelblatt, chief risk officer of Nomura, warned repeatedly of such "unintended consequences" from financial reform.

The challenges of managing systemic risk became starkly apparent during a panel discussion held this morning by the Securities Industry and Financial Markets Association.

In fact, the panelists agreed that the challenges are so immense that it's difficult to see how financial reform can succeed without limits on the size as well as the interconnectedness of financial firms, though some were more reluctant to impose such limits than others.

Anyone who thinks the Federal Reserve ought to oversee systemic risk ought to take a close look at this article.

By now, of course, it's no surprise that banks used yet another financing gimmick to make their capital look stronger than it really was. This one, involving Trust Preferred Securities known as TruPS, is doubly gimmicky, in so far as it involves both hybrid securities (i.e., a have your cake and eat it combination of debt and equity) and off-balance-sheet treatment. In terms of magnitude and significance, this stuff makes Andy Fastow look like a piker. Then again, Enron violated the letter as well as the spirit of the accounting rules. The banks were smarter than Fastow in that respect, or at least their lawyers and lobbyists were.

European regulators in countries throughout Europe are in the midst of proposing a wave of new regulations to resolve the current crisis and reduce the threat of future ones. So is the European Commission. But not all of the regulators’ proposals are complementary, which could lead to a wealth of difficulties should conflicting proposals go forward in different jurisdictions, especially if they contradict EC proposals.

As the WSJ reported on Friday, the EC has set out numerous draft proposals in further efforts to improve banking market strength—proposing a maximum limit on board memberships for individuals; forbidding individuals from being both CEO and chairman of a given company; setting risk management responsibility at board level; restricting pay packages for top executives; and consolidating oversight of rating agencies under a new EU agency that can levy fees, set penalties and demand information. The proposed new rating agency overseer is a change from proposals made by the EC last fall, which left oversight to each country.

The days seem numbered for banks' use of hybrid securities to raise capital.

The Senate version of the financial reform bill that was recently passed contains an amendment that would preclude bank holding companies from using trust preferred securities, the most common type of hybrids, as Tier 1 regulatory capital.

The market's reaction yesterday to German Prime Minister Angela Merkel's decision to bow to public opinion and curb what she called "destructive" trading brings the issue of financial transaction taxes and the like front and center.

But the fact that investors hate the idea of taxes and similar limits on transactions may belie the main argument against such measures, which is that the cost will simply be passed along to the public. If that were true, then traders' profits shouldn't suffer, and neither will markets' ability to help finance the real economy.

I see that Ben Bernanke, Sheila Bair and even Paul Volcker are trying to convince Congress not to require big banks to spin off their derivatives operations, or make other fundamental changes besides getting out of proprietary trading, the so-called Volcker rule.

Bernanke, in particular, is defending the rest of the current set-up and insisting, in effect, that regulators can take care of all of the rest of the problems that banks that are too big to fail represent, with just a few technical changes involving leverage and capital reserves and the like.

The Morgan Stanley case may not go as far as the one involving Goldman. And it is way too early to know what exactly prosecutors would charge the firm with doing.

But it's possible to venture a guess based on Yves Smith's observations today at Naked Capitalism.

The argument going on in Congress over the virtues of naked swaps for corporate hedging, or their lack thereof, is being echoed in the blogosphere today.

There are two posts on the topic at Berkeley economist Brad DeLong's site, for example. And in this one, a defender of such swaps points out that he has testified in Congress that companies need them to hedge business risk. He cites the hypothetical case of John Deere selling tractors in Greece. While the company could not buy swaps against the dealers themselves, he notes, it could easily hedge the risk they represent by buying a swap against Greek sovereign debt. Yet this proponent of swap nudity says that would not be possible under the amendment proposed by Senator Byron Dorgan.

Gretchen Morgenson's piece in Sunday's Times points out how Fannie Mae and Freddie Mac are serving as a source of back-door bailouts for the banks.

And she quotes Dean Baker, co-director of the Center for Economic Policy Research in Washingto,n DC, to the effect that their continuing status as half governmental agency, half private enterprise creates an irreconcilable conflict between taxpayers and shareholders.