Friday, June 25, 2010

Agreement in Congress on financial regulatory bill

At least there is some degree of certainty about what the financial "reform" bill will be. Uncertainty in markets leads investor thought to the worst possible outcomes. Even certainty about negatives is better for the market than a lack of information.

The apparent outcomes on both the proprietary trading and derivatives regulation are less onerous than they could have been. It will still damage profitability and related capital formation in areas that had nothing to do with the financial crisis but it could have been worse. While domiciling consumer credit oversight at the Fed will avoid establishing a major new bureaucracy, there remain many aspects of the bill that will restrain consumer credit expansion. Securities underwriters of asset backed securities will be less active while car dealers are breaking out the champagne to toast their new oligopoly in auto lending. Financial companies broadly will be looking at higher overhead costs to comply with all of the new regulation and whether this is a long term embedded cost or just a medium term adjustment is unknown. Capital requirements for financial institutions, a crucial issue, do not appear to be defined clearly other than a phasing out of the use of trust preferred securities as Tier One capital.

This is a massive and complex bill. In the coming weeks it will be analyzed by many constituencies and its probable impact will become more clear. That there is finally something to analyze is, at this early point, the only certain welcome news of this morning's announcement.


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