The Senate passed H.R.4173 (The Wall Street Reform and Consumer Protection Act of 2009) yesterday releasing the steam valve at major financial institutions across the board – reflected by Friday’s buoying of stocks by midday at Goldman Sachs (4.1%), Bank of America (4.25%), Citigroup (2.89%), JPMorgan Chase (5.26%), Morgan Stanley (5.34%) and Wells Fargo (4.25%).
The bill is still due to be reconciled with the House version of the bill, passed in December 09, primarily on account of the Senate version’s requirements, which would force big banks to forego as much as half of all trading revenue at the biggest firms, according to Bank of America Merrill Lynch analyst Guy Moszkowski, due to strict regulation of derivatives.
Analysts at Goldman Sachs quantified the effect of those changes from this regulation which would be most likely to actually survive, including fee caps on checking and credit cards, proprietary trading with bank capital, and specific House language regarding derivatives as roughly 17% of earnings – suggesting that if other elements of the legislation, which have a lower probability of surviving, remain intact, the figure could easily reach 23%.
Insurers are concerned about the proprietary trading and derivatives language because it will interfere with day-to-day annuity and life-insurance roll-overs, and routine portfolio-hedging activity.
A derivative is essentially an agreement contingent on some future change in the underlying (i.e., asset), a financial instrument extolled by former Fed Chair Greenspan throughout his tenure, and the new bill gives the Fed vast new powers while reconfiguring existing federal agencies:
• Federal derivatives oversight via a third-party insured clearinghouse/public exchange solution
• Federal regulatory powers created to write and enforce consumer protection for checking accounts, mortgages, and etcetera – beefs-up State regulatory enforcement capacity
• Federal Reserve has new authority over large financial firms; Council of Regulators created to analyze the market and monitor its health for signs of system-wide risk
• Office of Thrift Supervision merged into the Office of the Comptroller of the Currency
• Restriction imposition powers enhanced for regulators so they can manage troubled “too-big-to-fail” entities
• Liquidation of failing companies via an FDIC-like process used for banks in a similar situation which should alleviate taxpayer burden
• Executive compensation set by independent directors and shareholder nonbinding control via vote over the decisions
• The Volcker Rule in the Senate version particularly targeting proprietary investments, barring banks from making investments which do not benefit the client
• Protection via forced risk sharing for companies selling mortgage-backed securities and an allowance for investors to sue credit rating agencies