As you know, Senate Banking couldn’t agree on what to do with GSE reform during its mark-up of the Johnson-Crapo bill. It did, though, send one clear message: if it’s big and a bank, bye-bye; if it’s big but not a bank, belly up to the bar.

The bill as reported by Senate Banking tracks not just the 2013 Corker-Warner proposal, but also the subsequent leadership draft. It hopes to preserve trillions in thirty-year, fixed-rate mortgages and at the same time to replace the GSEs with private capital. Instead of these behemoths, private guarantors would hold the first ten percent loss position in eligible MBS. A federal backstop designed to be catastrophic reinsurance would then stand by.

Whether this would work as desired in terms of trillions of cheap middle-class mortgages is one big question. How it answers demands to protect affordable and multi-family housing is also disputed, as is whether the ten percent first-loss tranche is deep enough and if private capital can really be counted upon. All of these questions are critical, but for another day.

The one decision Senate Banking seemed able to make on a bipartisan basis across the ideological divide is that if anyone’s getting into the game other than Fannie and Freddie, it isn’t a big bank. Due to fears that large banks could become market oligarchs, Senate Banking’s 13-9 vote to approve Johnson-Crapo validated a ban on big banks taking on the GSE’s guarantor role.  

Does it matter from a business point of view that Congress wants to quash big banks? Yes, albeit not necessarily right now. Johnson-Crapo may be going nowhere, but the rewrite of financial regulation is fast and furious.

In the new era, financial regulation is quietly turning into a three-track system. On the first, best-laid track are community banks, which get preferred treatment – see a raft of new rules, FRB Gov. Tarullo’s recent call to carve them out of Volcker and compensation standards, and all of the reform bills FinServ approved on Thursdays that apply only to smaller banks.

The stand-still on rules for large non-banks leads some to think nothing is changing for them, but non-banks are actually on a very important second track because bad news for big banks gives them important strategic advantage. With the exception of SIFI designees – of whom there are very few so far – non-banks get to chug along largely unimpeded by current rules or prospective hurdles. The Johnson-Crapo bill is in fact premised on their ability to take over from the GSEs – for all the talk of small lenders, everyone on the Hill knows they haven’t enough capital in aggregate to take over from the GSEs. Big firms are the answer and, if they can’t be banks, they’ll have to be something else. Congress doesn’t know what that is, but it likes whatever it might be better than big banks.

That’s at the heart of the problem Johnson-Crapo epitomizes: big banks are on a third track heading nowhere that any shareholder wants to go. That most of the new rules are justified is undisputed. That all of them make a difference is already clear in the radically different business models that big banks are being forced to adopt. That this isn’t enough for big-bank critics is understandable – it’s hard to let bygones be bygones when the 2008 crisis cost trillions in lost wealth, lost homes, and lost jobs.

But, if big banks are going to be sidelined – and Johnson-Crapo suggests strongly that this is the new political reality – the U.S. has erected a new financial-market paradigm not on purpose, but rather by default. Sometimes engineering by accident has surprisingly good results, but mostly it leads to costly clunkers. If the new financial system can’t intermediate efficiently without big banks – and no one knows yet if it can – then arbitrary sanctions against some financial institutions based solely on the charters they hold and the assets they have gathered could have very perverse macroeconomic consequences.