Issues Remain in the Final Push for Financial Reform


What should be the final push for a financial reform billis now under way as a House-Senate conference committee began meetings last week to try to merge the two versions of the legislation.

There are 78 members of the committee, which is chaired by Rep. Barney Frank (D-Mass.).A working draft of the bill was also released—all 2,000 pages of it. If you’re looking for a little light reading on your summer vacation, you can read the bill here.

The goal is to have the differences ironed out and final legislation through Congress and signed into law by President Obama before the July 4 holiday weekend. That leaves three weeks to get it done, but my guess is they’ll do it, or at least come close. The summer recess is scheduled to begin August 9, and you have to figure that would be the absolute latest. Nobody on Capitol Hill wants to see this process delayed until September, when the November elections would be right around the corner.

Coming up with the compromise bill will be no easy task. As we’ve discussed here in Investor Briefand more extensively in my Wall Street newsletter over the last several months, some of the most controversial elements of the bill have yet to be settled. At the top of that list is what to do with derivatives, and there are reports that will be the last item the committee will tackle.

Derivatives can be exceedingly complicated. They can also hide problems, which is what reformers want to change. In essence, derivatives derive their value from another asset, like your mortgage. Your mortgage could be part of many different derivatives, meaning there is a chain of investments whose values are all tied to whether or not you make your payments.

Derivatives trading is a significant source of revenue for many banks. The House version of the bill seeks to regulate them mostly by standardizing trading on a transparent exchange. The Senate bill, however, has an amendment from Sen. Blanche Lincoln (D-Ark.)that would force banks to spin off their derivatives-trading operations.

Lincoln, of course, survived a tough challenge last week in Arkansas’ primary, and there has been debate whether she will be emboldened in her fight for this amendment or whether it served its political purpose and she will soften her stance. Her early comments indicated that she plans to continue her fight to keep the language in the bill.

The thinking among many observers right now is that the amendment will be stripped out, watered down or possibly even replaced by the so-called Volcker Rule, which would separate proprietary trading (banks using their own capital) from pure vanilla lending. As I’ve mentioned before, defining what exactly constitutes proprietary trading would be very difficult, so it’s hard to imagine the Volcker Rule being included in its current form.

However the process shakes out, the next few weeks are likely to end with passage of historic financial legislation. Companies throughout the entire financial industry are watching and waiting for answers to all kinds of questions about what they can and can’t do, how their earnings power will be impacted, what structural changes they will need to make, and more.

We will watch the process unfold and explore the ramifications of the bill for the markets, the industry and, ultimately, investors.



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