Financial Reform Looms
The question of financial-sector reform has morphed from one of “if” to one of “when.”
After days of filibusters to block debate on a White House-backed reform bill, Republicans gave up that fight. With a bill already passed by the House of Representatives, it appears likely reform legislation will pass this year. How this will affect financial firms depends on the final provisions, but even a conservative reading suggests major changes may be in store for the largest financial companies.
Provisions of the bill currently up for Senate debate include:
• Creating a Financial Services Oversight Council to monitor financial markets and a Consumer Financial Protection Bureau to police lending.
• Giving the Federal Reserve power, with council approval, to break up large companies that pose a “grave threat” to the financial system.
• Barring companies with commercial banking units from speculative trading for their own profit.
• Mandating that the complicated derivatives frequently blamed for the financial crisis be traded on public, regulated exchanges.
President Obama wants a final version “very soon,” but any Senate compromise will need to also pass the House. Democrats have reportedly agreed to scrap a $50 billion bailout fund, but some Republicans are also pushing for the elimination of the Consumer Financial Protection Bureau.
So far this year, the S&P 500 Financial Sector Index has risen 11%. Wall Street expects the sector’s earnings to rise more than 140% for the year. While we are looking for opportunities in the sector, insurers Aflac ($49; AFL) and Travelers ($50; TRV) are the only financials on our Buy List. The average profitable financial stock in the index trades at more than 16 times estimated earnings for the current fiscal year.