Unlocking Real Value Blog

A Preview – Final Negotiations on Financial Reform

The next month or so will be filled with uncertainty for our industry as the House and Senate negotiate away the differences between their versions of financial reform. As usual, and in a rush to judgement, a false deadline of getting the bill on the President’s desk by July 4th has been set as the goal by Barney Frank. As I have commented before, it would be nice if for once the politicians would settle for getting it done right rather than getting it done quickly.

Nevertheless, a few things seems apparent – there will probably not be a fiduciary standard imposed on all advisors in the financial services industry (meaning that this particular debate will rage on indefinitely), and the final bill, though large and significant, will probably not be as bad as feared by many industry participants and not as far-reaching as the financial reform of the 1930s.

The profitability of banks is sure to be negatively impacted; by how much is uncertain at this point. But this bill does not signal the end for the banking industry – as in the past, banks (as many other businesses) will find new business lines to enter into to replace lost profits.

The four main areas of negotiation to keep your eyes on include 1) derivatives – will banks be required to spin-off their derivatives units as currently is in the Senate bill; 2) proprietary trading – will the “Volcker Rule” be part of the final bill – a rule which bars banks from making trading bets with their own capital or from owning hedge funds or private equity firms; 3) consumer protection – the House bill calls for a new independent consumer financial protection agency while the Senate has it housed within the federal reserve; and 4) too big too fail. The likely final bill will probably have a diluted derivatives restriction, a water-downed version of the “Volcker Rule,” an independent consumer credit agency and some sort of bank tax to protect against too big too fail.

Importantly, however, and oft looked in today’s debate, is the fact that nothing in either bill on the table right now makes it mandatory that future homeowners need at least 20% down to buy a new home. Absent a change in this, which does not seem likely, and regardless of any other positives in this bill, the door has been left open to future housing problems not dissimilar to the one of the recent past. In a rush to punish Wall Street and appeal to voters, have our elected officials left us vunerable to another financial crisis?

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