The path for passage of financial reform now appears cleared. A key Senate cloture vote (needed to beat back any procedural blockades) was expected to happen Thursday, with three key Republican votes (Massachusetts’ Scott Brown and the Maine duo of Susan Collins and Olympia Snowe) supposedly secured, meaning that the long awaited regulatory overhaul legislation, 22 months in the making, could be signed into law before President Obama heads off to Maine for vacation Friday.
One might expect the mood on Wall Street to be somber.
And yet, JPMorgan has just revealed a monster second quarter, beating analysts’ expectations. The stock market is coming off a whirlwind rally with the Dow up 7 percent in six trading sessions through Tuesday. Headhunters say that investment bankers and traders are back in demand. Hedge funds are getting more margin as banks loosen lending standards, a Fed survey showed. The Wall Street Journal reported Thursday that the world’s banks appear to be winning a reprieve from tough new capital requirements.
If financial reform has anyone on Wall Street crying – then these are tears of joy.
Some of Wall Street’s worst fears — not being able to deal instruments such as credit default swaps anymore, for example — were put to rest as the bill became finalized. The controversial “Volcker Rule,” named for Obama advisor and former Fed Chairman Paul Volcker and aimed at preventing banks from engaging in certain forms of hedge fund style trading, ended up being watered down. In fact, banks will have as long as 12 years to ultimately rid themselves of proprietary trading businesses and hedge fund investments. The bill calls for 39 studies of issues ranging from how to reform rating agencies to what constitutes proprietary trading. When an issue is tabled for further study, often it is not brought up again.
Additionally, most of the rules are still to be written, giving the banks more time to influence the process and stave off drastic changes. Some 11 agencies will be tasked with formalizing 243 rules.
Many of these are the crucial measures cutting to the heart of what caused the crisis in the first place, issues such as deciding how much, at a minimum, actual capital banks need to keep on their books versus what they can borrow on a daily basis to stay afloat. In the case of banks requiring bailout funds, many of these institutions were not so much insolvent as they were temporarily illiquid, meaning that in some cases, with respect to their overnight borrowing, they had bitten off, on a short-term basis, more than they could chew.
I’m not suggesting Wall Street is taking a victory lap, because there is plenty in the bill that has the banks concerned about their bottom lines.
A lobbyist told me “anyone who thinks this is a gift basket to Wall Street is sorely mistaken. There’s a lot of things in the bill that are going to severely impact the banks’ bottom lines and their ability to lend. No one on Wall Street is happy about the negative impact of this bill, trust me.”
For all the hue and cry over the bill, there are some pragmatic changes coming, which may bring joy to anyone truly concerned about averting the next near financial meltdown.
Institutions are going to be subject to more oversight, and more stringent capital and collateral requirements. In terms of preventing another AIG type catastrophe, such measures start to move us toward accomplishing that.
Joy to the world.
