UPDATE 1-Chanos says banks not scared by Obama's tough talk

By Joseph A. Giannone NEW YORK, Oct 29 (Reuters) - James Chanos, the famed short seller who was among the first to spot Enron's fatal flaws, says the banking industry will probably avoid any serious reforms out of Washington. Following the mortgage crisis and last year's market collapse, an angry public called for tougher rules on banks that took trillions of dollars of government aid. The Obama administration came into office with expectations that it would clean up Wall Street and restore soundness to banks. Instead, financial services executives have found they have little reason to worry, Chanos told a panel discussion hosted by the New York Historical Society on Wednesday night. "This is an administration that speaks loudly but, quite frankly, no one fears in terms of financial regulation," said Chanos, president of hedge fund firm Kynikos Associates LP. "Congress has been so co-opted by the financial services industry that we are seeing real attempts at real reform being derailed every step of the way." This balance of power was illustrated last month when President Barack Obama visited Wall Street on the anniversary of the collapse of Lehman Brothers, he said. Obama, in a public speech, admonished the banking industry, but not one major bank chief executive was in attendance, Chanos said. NO TEETH In Washington, an industry that barely survived the worst financial crisis since the Great Depression has largely succeeded in minimizing potential reforms. Efforts by lawmakers to ensure no bank will ever be "too big to fail," to empower a systemic risk regulator and to form a consumer financial protection agency have all been watered down in the face of bank industry lobbying. "There is a lot of legislation coming down, bills are being marked up as we speak," Chanos said. "There will be a lot of sturm und drang, a lot of ink spilled, but at the end of the day not a lot of teeth in most of it." Chanos, who now lobbies U.S. lawmakers on regulatory policy, said he is worried that a lot of the public's anger may be easing as time passes and markets bounce back. "People will take it that we don't have to do anything, which would be a big, big mistake," he said. Chanos made his reputation and fortune by digging through company financial statements, spotting shifty accounting, balance sheet gimmicks and other red flags. He famously called out energy trading company Enron long before it collapsed under the weight of a massive debt load and nonexistent revenue. In recent years Chanos has become an active voice in Washington as founder and head of the Coalition of Private Investment Companies, a group that focuses on policies and rules concerning hedge fund firms. He has testified before congressional committees on banking and capital markets. This year Chanos the short-seller turned his spotlight on health care and pharmaceutical companies, a sector he says has become bloated after decades of rising government spending. He sees health care reform and U.S. budget constraints reducing spending and eroding earnings. CHINESE BUBBLE Chanos believes China's economy could be headed for its own troubles.

Years of steady 9 percent annual economic growth -- in itself a warning sign, he said -- have been driven by massive infrastructure spending funded by Beijing. "China has embarked on a capital-spending bubble the likes of which the world has never seen," he said in his first public comment on the topic.

"Buildings are going up with no tenants, roads are built with no traffic, shopping centers are built with no tenants or customers, yet they continue to be built and they continue to be planned." It would be a big problem if China goes the way of Dubai, whose economy has stumbled in the wake of over-construction and development, he said, but the issue is not getting any attention in Washington. "China is Dubai times 1,000, if not a million," he said. "At some point, all of this (ill-advised) investment will come home to roost." (Reporting by Joseph A. Giannone; Editing by Lisa Von Ahn and John Wallace) Keywords: FINANCIALREGULATION/CHANOS ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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