The New Financial Reform Bill is Not Wall Street's Nightmare

After the financial reform bill finally comes out, President Barack Obama is clearly very satisfied with the new financial reform. Obama claimed that 90% of the content in this bill is congruent with his original ideas. However, the 10% of the financial reform bill that Obama does not agree with, is exactly the core and the soul of this financial regulation reform. This 10% is also the part that makes all the Wall Street players holding their breath.

Even though the bill still has the Volcker Rule in it, the content has been neutralized a lot. The bill says that Wall Street banks cannot invest in PE or hedge funds in more than first grade capital level's 3%. On the other hand, the Senate's version of the financial reform bill completely bans the investment of financial institutions in PE, hedge funds and similar funds.

Regarding the very controversial financial derivatives trading, the new bill allows banks to continue to keep foreign exchanges, interest rates, and other trading businesses. The new bill is much more mild about financial derivatives trading because the original Senate version of the bill also requires banks to completely stay away from the above businesses. The new bill, however, requires banks to steer away from potentially high risk businesses such as farm products, energy, complicated credit default products and other risky commodities trading. The wording of the bill regarding financial derivatives trading is relatively unclear. Regarding the most lucrative area of free trading, the new bill gives banks a lot of room to wriggle, as it allows banks to use their own capital participate in legal and necessary risk hedging and trading businesses.

How will this new rule from Washington affect Wall Street in the future? The market's first indication is positive. After the bill was first passed, the stocks of all large financial institutions rise together. Among them, Goldman Sachs and Morgan Stanley led the way. These two financial firms have always been regarded as the banks that will be influenced by the financial reform bill the most.

Considering the American public's strong sentiment against Wall Street firms, the financial reform bill would be supported by the majority of the people. The White House claimed that this financial reform bill is unprecedented in American history. Even though most people view this bill as relatively mild, this bill is definitely brave and unprecedented. Wall Street banks, on the other hand, though do not like the bill, is happy that the bill is as harsh as they think.