Financial Reform Looms

5/10/2010


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.


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