Prospects Remain Dim for Financial Services

President Barack Obama this week proposed a major overhaul in financial-industry regulation. If approved by Congress, the many proposals would affect virtually every aspect of the financial system.

But the plan likely faces opposition both from those who say it would hamper free markets and others who say it doesn't go far enough. The White House hopes Congress will pass a comprehensive law by year end.

The plan may well be the most important financial-services legislation of the last 50 years. President Obama called it “a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.”

But on Wall Street, the general reaction is that, despite the large number of proposals, they overall aren't as drastic as feared. In other words, this legislation really means more regulation than it does a dramatic overhaul of the financial system. Plus, it has been inevitable for some time that a significant increase in federal regulation was coming and unavoidable.

For consumers, the legislation likely is a plus. Among the major and most controversial features, a Consumer Financial Protection Agency would set and enforce rules concerning mortgages, credit cards and other consumer loans.

From an investment standpoint, the key message is that increased regulation, higher capital requirements and other features will reduce the volume and profitability of financial transactions. In other words, the financial-services sector is unlikely to return any time soon to the glorious money-making era that led to soaring profits and extravagant excesses.

A big question for investors is the extent to which current share prices of banks and other financial institutions reflect a less robust future. Wednesday, 10 financial institutions repaid $68 billion of TARP money to the federal government: American Express (AXP), BB&T (BBT), Bank of New York Mellon (BK), Capital One Financial (COF), Goldman Sachs (GS), J.P. Morgan Chase (JPM), Morgan Stanley (MS), Northern Trust (NTRS), State Street (STT) and U.S. Bancorp (USB).

These are considered among the healthy institutions. But while this is a significant step, there's a long way to go. On Wednesday, Standard & Poor's downgraded 18 banks, mostly regionals, including BB&T and U.S. Bancorp of the so-called healthy group above. Also on the list: Wells Fargo (WFC), which with Bank of America (BAC) has not yet received permission to repay its Federal bailout money.

The portfolios of many regional banks are full of corporate, mortgage and commercial real estate loans from economically hard-hit areas. The banks have already lost billions on these loans. But they likely will remain under heavy pressure so long as unemployment continues to rise and home prices drop. Commercial real estate mortgages are considered particularly vulnerable to a continued lackluster economy primarily because relatively few defaults have occurred so far.

Our view is that financial-services investments generally are best avoided.

Comments

[Econ 101:]

Right on FE!

We dont need more reulation, politicians only regulate those who dont pay them off with campaign contributions.

Remember "It is only class warfare when we fight back."

Support R 1207, an Audit of the Federal Reserve


On Jun 19 07:54 PM no more fe wrote:

>
> bankers selling our childrens futures..for more bailouts? the disgrace.
> it's horrible. too big to fail needs to fail. we neeed LESS bailouts.
> If you fail U fail.

Jun 20 12:59 PM

[David Roskoph:]

Steve,

Stand back and look at this from another perspective. We've had a full decade of destrustion and now we are getting a decade or reconstuction; a depression and recovery in internet time. The carnage is obvious even through the time has been compressed. The present stimulus will function as a world war did 60 years ago. Only now the entire world is dancing to a capitalist tune. The value of the US franchise remains atop the world despite our mortgage-backed dalliances and bankrupt status. It's a recovery, there is no Great Pumpkin.

Jun 21 01:34 AM