Friday, May 21, 2010

Financial Reform and the Conference Committee

Since early May, the Dow Jones Industrial Average has fallen 1200 points and credit markets have tightened dramatically due to the European debt crisis. Counterparty risk is increasing and some analysts now predict a Lehman II type credit crunch.

Against this backdrop, the US Senate finally passed a 1500 page financial reform bill. It seems impossible right now for anyone to say for sure what is in the bill, but I do take comfort in the fact that Elizabeth Warren, a consistent voice in favor of consumer protection and rational regulation, states that:"No bill that deals with big issues is ever perfect, but the Senate's Wall Street reform package will go a long way toward preventing the kinds of abusive practices that brought our economy to its knees."

Still, the next step in the legislative process is critical. The bill is headed to conference committee. This crucial committee has final say on the content of the bill, and they work in secret with zero record of who put in what and therefore zero accountability. I have often posited that the conference committee is tailor made for the exercise of special interest influence. And, early indications suggest that many interests such as credit card firms and auto dealers and Massachusetts financial firms are already poised to have final sway over the bill.

What impact this bill will have on market action is anyone's guess. But it is certainly a wild card factor in a market that is plenty wild already.

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