So I had to run out of here before giving the full endgame on the FinReg conference committee yesterday. You can read through my Twitter feed for a play-by-play. A number of provisions were settled, including a deal to permanently increase FDIC deposit insurance to $250,000. But the biggest deal was the credit rating agencies, and the batting average for reformers on this issue is not high. It’s a bad sign going forward.

Barney Frank and the House submitted an offer to cancel out Al Franken’s rating agency solution that would have dealt with the conflict of interest inherent in the issue-pays model by having an SEC agency assign products to the agencies for an initial rating. In its place, Frank offered a two-year study, notoriously the signal of delay and eventual denial. The Senate counter-offer basically accepted that study, though at the end of the two years, the SEC would have to come up with some solution to the conflict of interest, and they would have to give priority to the Franken solution. I’m not sure this holds a ton of water. As reform expert R.J. Eskow told me, “it sounds like they have to come up with a rationale for not using Franken before they go with Plan B – which could be, for example, requiring every credit agency to issue an annual statement about internal controls, etc., yada yada… I’m upgrading my rating from ‘grotesque’ to ‘lame’ – which is not quite as good as ‘ineffectual.’”

The House agreed to the Senate counter-offer, and it has been properly described as a win for the rating agencies, and that they dodged a bullet. Shares of companies that own the rating agencies went up 5 and 6%. Chris Dodd and Barney Frank got away with calling the Franken option “complicated” and “unclear” and basically sent it off to die in a study. Franken put his best spin on it:

Today’s compromise is not everything we wanted, but it’s a major step in the right direction. Wall Street’s broken credit rating system played an enormous part in our economic meltdown, and it’s our duty as lawmakers to make sure that never happens again. We know that conflicts of interest rewarded cozy relationships instead of accuracy, and we know how to fix the problem. The language agreed on by the conference committee means more time and more study than I think is necessary, but it also means definite action will be taken. And that’s a win for everyone looking to protect consumers and hold the industry accountable.

In an amusing moment, Rep. Spencer Bachus (R-AL), the ranking member on the House Financial Services Committee, asked to extend the time frame for implementing something on conflict of interest to 2 years and 8 months, because “that’s when we might…” and Barney Frank finished his sentence, “win the White House.” I suppose the saving grace is that a possible President Palin or Romney will have nothing to do with this, but it’s a cold comfort.

Some reformers find even more important the section 436(g) reform, which would provide liability standards for the rating agencies if negligence or corruption is found to have influenced their ratings. The House had this, the Senate didn’t, and the Senate rejected including it in the final draft. Frank said he insisted, adding, “We didn’t do everything on rating agencies, but to extent that we did much, it seems to have been dropped.” There was no solution yet.

More than the specific issue, the trajectory is bad. On the only contentious issue so far, reformers basically got wiped out. The bill almost perfectly combined the worst of the House and Senate bills. There’s reason for optimism in both cases – 436(g) is not over, there’s “shall” language to force some change to conflict of interest, Franken’s solution is at the head of the line – but there’s more reason for pessimism. And that’s a bad deal going forward. Reformers are more invested in some of the other issues, and it may not be as easy to go with the banks on them. But I don’t like what I’m seeing.

UPDATE: Tim Fernholz, who has generally been positive on the Wall Street reform process, called yesterday’s proceedings “a major setback” that “doesn’t bode well for an inspiring finish”, but notes that one important reform did get added, requiring hedge funds and venture capital funds to register with the SEC.

UPDATE II: This is a major update. After some negotiation, the Senate agreed to removing the liability standard exemption for the credit rating agencies, known as 436(g). That means that the rating agencies would be just as liable for negligence as other parts of the financial industry. That’s a pretty big win for reformers. In addition, there’s a clarification on the Franken amendment which didn’t sound all that different to me. Basically, the SEC would “prepare an implementation” of something to do with killing the conflict of interest, with priority to the Franken amendment unless they come up with something better. There’s plenty of wiggle room there, but this all sounds better than yesterday.