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Wall Street Turning a Deaf Ear To Congress's Call for Reform

While Washington has developed a laser-like focus on Wall Street, the investment capital of the world has not seemed to return the favor.

Congressional attacks on Wall Street turned more acute during the financial crisis bailouts and come into clearer focus this week with hearings into the trading practices of financial giant Goldman Sachs .

But despite all the vitriolic calls for reform in the murky world of derivatives trading and the attacks on big-banker greed, investors seem to have noticed little: The major stock averages are far more influenced by other pressing matters, edging ever higher to within 20 percent or so of pre-crisis levels despite all the clamor from the Capitol.

Even Tuesday's sharp drop in stockswas caused more by European debt problemsthan all the energy coming from the Goldman hearings.

"As a retail investor I don't stay up late at night over this, mostly because there's not a bloody thing I can do about it," says Laura Corsell, a former staff attorney with the Securities and Exchange Commission and now a partner with the investment management group at the Montgomery McCracken law firm in Philadelphia.

"I don't think anything the government might do will cause the average investor to pull back and put money in the mattress," she adds.

That approach is common from investors who respond to polls saying reform is needed in Washington but who often get lost in the details.

Calls for change, then, get muffled within the general anger directed at the national power structure.

"There is an emotional divide between Wall Street and investors," Corsell says. "The populist sentiment is anti-Wall Street and at the same time anti-government."

When Barack Obama took over the presidency in 2009 he sparked a wave of apprehension among investors who thought his administration would go beyond taking on the Wall Street power brokers who caused the financial collapse and try to enact policies that would dampen the entire investing climate.

But financial reform has been slow to come—derailed in some part by the protracted and bruising fight over health care reform—and many observers think that the final changes will have little real impact on Main Street investors.

In fact, the health care battle draws parallels to the fight over financial reform in multiple ways. Both efforts started out with strident positions but then turned more nebulous through the lobbying and legislative grind.

Without changes that investors can clearly grasp, the reaction has been a recent flatlining of the market.

"That's the key—clear and direct reform. Absent that, the market just moves on," says Quincy Krosby, general strategist at Prudential Financial. "It's very hard for Congress to come up with something that is clear and direct. Even after the health care bill had passed there were still questions. Ask analysts, ask physicians—they still haven't figured it out."

And as with health care, the cloudiness of financial reform could leave investors wanting for more later, says Susan Fulton, founder and principal at FBB Capital Partners in Bethesda, Md.

For Fulton, Congress had an opportunity to draw back the curtains on many of the nontransparent investment vehicles like the one at the center of the Goldman case, but did not take advantage.

"The big lobbying guys have so watered it down and put bits and pieces to it that I don't see a lot of opportunity for investors to do well on this," she says.

"While we do have prospectuses that disclose things, in very many things they are so complicated and convoluted that people can't make sense of them," Fulton adds. "I am very discouraged by the level to which lobbyists managed to get this thing glued up. Certainly it's better than it was. But if it was really good legislation there would be bankers crying on their doorstep, and there's no bankers crying on their doorstep."

Rather than attacking problems more aggressively, Congress has decided "they don't want to rock the boat. They want to stabilize the situation," says Doug Roberts, managing principal at Channel Capital Research.

Congress has chosen to pursue individuals rather than the institutions themselves, something that further distances the retail investor from the legislative process, Roberts adds.

"Banks may be too big to fail but bankers are not," he says. "It's being played out in the court of public opinion."

But not, it seems, on Wall Street, where investors are far more sensitive to other market influences—earnings, unemployment and Greece's debt to name three—than they are to Washington.

"If it's confusing for the professional investors then for the retail investor it raises far more questions," Prudential's Krosby says. "When there are questions, the best answer is just to pause."

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