While Republicans (joined by Sen. Ben Nelson, D-Warren Buffett) voted last night to slow the Democrats' financial-companies reform bill, today's Goldman Sachs hearing, with boss Lloyd Blankfein sitting before Senators to defend Wall Steet's practice of betting against its own clients, will add to pressure for "a tough financial reform bill (to) pass and be signed into law by the end of May," writes FBR Capital Markets analyst Paul F. Miller Jr. in a report to investors.
Miller sat clients down with Peter Wallison of the American Enterprise Institute and Washington regulator-turned-corporate lawyer Thomas Vartanian to review prospects in a conference call yesterday. Highlights:
- Wallison says the Democrats' bill will force financial companies "to confer with the Federal Reserve before creating new financial products, making it hard to compete in a global market. He did not believe the Republicans will have much ability tosignificantly alter the outcome of this legislation," which is unlikely to be reversed even if the GOP gains in Congress this fall.
- Vartanian says the proposed inter-regulatory Systemic Risk Council will be a "political" body in danger of "stifling innovation"; while the proposed independent Consumer Financial Protection Agency "will certainly increase consumer protection, but it runs the risk of driving off costs (and) disclosures, and (reducing) credit to everyone but the most creditworthy."
- Bank tax. Both parties seem to accept a new $50 billion big-bank "resolution fund" for the next bailout. Democrats want to tax the banks and collect the money before anyone blows up; Republicans are resisting, which would force Congress to find around $17 billion from other taxpayers - maybe through banks' repaid TARP funds.
- Derivatives. Sen. Blanche Lincoln, D-Ark. passed a relatively strict bill through her Agriculture Committee that would push government-insured banks to sell off their swaps-trading businesses, consistent with the "Volcker rule" that would get commercial banks out of proprietary trading altogether. Vartanian thinks Lincoln's language will be added to the reform package; whereas Warren Buffett's "exemption for existing derivatives contracts" will likely fail.
"The most likely course of action remains a bipartisan compromise, but one that produces a bill tougher than originally expected), which allows for a Senate vote and reconciliation with the House's financial reform package in time for the President to sign a bill before the end of May."