Sunday, June 27, 2010

Bank reform: Did we get it? Hard to say.

After reading several reports about the landmark financial industry reform bill that is moving to President Obama's desk, I can't say that it means much to average investors including those of us Sixty and Single. Generally the experts are calling the bill a step in the right direction, but only time will tell if anything in it will prevent a future banking industry meltdown. Some complain that more government oversight and promises of backing will actually prompt banks to take more risks down the road, not fewer. If it's any indication of who wins and who loses with this bill, bank stocks are moving higher with the market belief that big banks will remain in tact and their profitability will take just a small hit. The 2,000-page bills leaves much to be fleshed out by government regulators. That could take years.
Banks dodge a bullet
For those who own bank stocks, the bill is short-term good news, but I wonder if this bill does anything to really reform an industry that devastated the American economy, trashed retirement savings and put many people out of work. The new financial consumer protection agency (to be run by the Federal Reserve) will monitor lending practices to consumers, but it is not yet clear how much new regulation will be put in place.

Here's what analysts are saying:
"Over the past year, regulators have reined in banks' most abusive practices—from excessive overdraft fees to the way lenders raise interest rates when a credit-card payment is late. The new rules are expected to slice billions from firms' profits. - Wall Street Journal's round-up story.
"For all of the specific reforms, the legislation leaves intact a handful of behemoth, multitasking banks whose size and scope would make them difficult to dismantle in a crisis, even under a new law." - New York Times.
- "Americans have paid for the financial crisis with their jobs, incomes, savings, investments and home equity, and with their faith in markets and in the government to protect them from harm. The new bill is a step toward redressing those losses and restoring that faith. Congress should pass it, and then do what must be done to ensure that it performs as advertised." - New York Times editorial.
- "Why should anyone expect some paper-pushers in Washington to prevent something as complicated as the next great financial meltdown when they couldn’t stop Bernie Madoff's Ponzi scheme? -
- "Analysts said the deal removes a huge cloud that has hovered over the financial industry for much of this year. Investors have feared that intense regulation would devastate bank profits. Now, the market seems to believe that financial companies would do well even with the new limits on their business." Assciated Press.
- "They come out of this big-time winners," Bob Froehlich, senior managing director at Hartford Financial Services, said of financial companies. "Two years later, people will look back and say 'My gosh, nothing really changed.'" quoted by the Associated Press.
- "Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis. - Bloomberg Businessweek.
- "The legislation is “largely a fig leaf,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “Given where we were when this got started, I’d have to imagine the Wall Street firms are pretty happy.” - Quotes by Bloomberg Businessweek.
Investors and analysts including Optique Capital Management’s William Fitzpatrick said bank stock prices have already factored in any likely reduction in revenue from the changes. “Profitability is indeed going to take a hit and we’re going to see more stringent capital requirements,” said Fitzpatrick at Milwaukee-based Optique. “The changes are most certainly necessary. They can certainly lead to a more stable and predictable earnings stream.” Still, he added, “this doesn’t remove all of the elements of financial distress that could lead to some of the challenges we had in 2008.” - Quoted by Bloomberg Businessweek.
So there you have it from some of the best financial industry observers. One good thing....with this bill out of the way, banks may be again willing to lend money, which will help the larger economy. But will interest rates get better any time soon on our retirement savings accounts? No. The Fed's latest report suggests we'll be waiting until 2011.

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