Last week the Senate passed a financial reform bill, guaranteeing that some kind of bill will end up on the President’s desk.
In addition to regulations that affect the ratings agencies and credit card companies, the bill contains a provision that would radically alter the nature of derivatives use among banks. It’s the Blanche Lincoln amendment that everyone (Democrat and Republican) thinks goes too far. But it’s in the bill, and Wall Street’s hope is that when the House and Senate reconcile their two bills, it will disappear.
As Mike O’Rourke of BTIG notes, Wall Street is now in a weird place:
Although several measure gravitated back towards the middle, some measures have been so radical that it caused the Fed, the FDIC, and Treasury (and thus the White House) to lobby on behalf of the Financial Industry. The resultant situation is one in which Wall Street and Main Street find themselves looking to the moderate left, and even some of the far left, to save the financial architecture from the extreme left. (Just for the record, the extreme right environment of the past decade, while interesting, was hardly healthy).
As extraordinary as it sounds, the Financial industry must now rely on legislators like House Financial Services Committee Chairman Barney Frank to make sure the politicized aspects of this bill do not push the nation’s financial system off a cliff.
The assumption everyone is making is that the Lincoln amendment will go.
But weird things happen in politics, and inertia and political expedience make it so that nothing can be taken for granted.
As Bloomberg notes this evening, credit markets continue to flash a big warning sign. The junk market has had a horrible month, and bank funding is getting more expensive (though still low by historical standards).
But many are presuming that financial regulation uncertainties are why. Again, most likely, things will resolve themselves favourably for Wall Street. But if they don’t, we could end up instantly creating a mess the bill was designed to prevent. That would be ironic, to say the least.