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by Derek Loosvelt | May 21, 2010


At least partially a result of the very public fraud case filed against Goldman Sachs by the SEC, the U.S. Senate was able to pass an even stronger financial regulation overhaul bill yesterday than their fellow public officials in the House did a couple months back.

Christopher Dodd and Barney Frank

Although the largest Wall Street firms (Goldman, the Morgans, BofA, Citi) stand to lose a significant chunk of change if some of the bill's proposed new rules are signed (the Volcker rule, in particular), looking at these banks' stock price movements today you would've thought the bill had been blocked.

As of 3:45 p.m. EST, Goldman Sachs' share price was up about 3 percent on the day, JPMorgan Chase's had risen nearly 5 percent, Morgan Stanley's was also up about 5 percent, BofA's shares had climbed 3 percent and Citi's price had increased about 2 percent.

Since market movements immediately following major news announcements typically indicate the affect that investors and analysts believe the news will have on a company, you would assume by the share increases that these banks are not at all afraid of the new regulation.

It is also possible that investors and the market believed the new regulations could have been much worse, or that they are merely waiting it out: no regulation will be official until after the Senate and House reconcile their respective bills, and many industry observers and insiders believe that the toughest proposed measures (such as the Volcker rule, which will force big banks to spin off derivative trading operations) will not pass.

No matter if the toughest rules do or do not ultimate see the light of day after the closed-door Congress reconciling, the passing of overhaul bills in the House and Senate is a giant win for the left side of the aisle, giving them not one but two (health care reform and now financial regulation reform) big rallying points come midterm elections in November. (Of course, it will also give the tea-bag-dipping right side of the aisle—who, for the most part, do not like either bill—rallying cries of their own.)

As for how the new regulation will affect the operation of financial firms going forward, a few things are clear, and should be welcome news for investors and taxpayers alike: hedge funds, ratings agencies, derivative trading, insurance companies and large financial firms that pose systematic risk will all be, at the very least, policed more than they had been in the past.

However, what isn't clear is if the new rules and regulations will do anything to prevent another recession (which is the point of the overhaul, if you recall) or if big (too big too fail) banks will change their ways as a result.

What I fear is what we've seen before and not all that long ago (remember the crackdown on conflicts of interest between investment banks' research and advisory divisions in the early aughts?): when big public investment banks are blocked on one end, they have proven to be extremely adept at stopping on a C-note, changing directions, and finding plenty of other holes elsewhere in the sy$tem.


Filed Under: Finance