What Does Financial Reform Means For Investors

The rules of investing are about to change. After months of debate, political attacks and even a few lies, Congressional leaders came to an agreement on Wall Street financial reform at 5:29 this morning. Now investors have the arduous task of filing through over 2,000 pages of legislation and uncovering what it means to them and their portfolio.

Connecticut's Democratic senator, Christopher Dodd, was close to tears as he announced the deal. "It's a great moment. I'm proud to have been here," he said. "No one will know until this is actually in place how it works. But we believe we've done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done."

Of course, the reactions from the nation's lawmakers are mixed, following party lines. While Treasury Secretary Tim Geithner says the bill "will offer families the protections they deserve, help safeguard their financial security and give the businesses of American access to the credit they need to expand and innovate," Republicans like New Hampshire's Judd Gregg are less optimistic.

The financial reform bill is a failure, he says. "It will not encourage much-needed stability and confidence in our financial markets. It will not significantly reduce systemic risk in our financial sector."

So what is in this financial reform bill? It contains a greatly scaled-back version of Sen. Blanche Lincoln's (D-Ark.) provision that would have forced the country's most prominent banks to unload their derivative trading desks.

The latest compromised proposal compels banks to spin off their riskiest derivatives businesses, like credit default swaps, but falls short of doing anything to limit more strategically motivated trades dealing with currencies, commodities or interest rates.

"One goal of these limits is to reduce participation in high-risk activity that can cause significant losses at institutions which are central to the financial system," Dodd said. "A second goal is to end the use of low-cost funds, to which insured depositories have access, from subsidizing high-risk activity."

His last sentence refers to the so-called "Volcker rule," which disallows banks from trading with their own money. While the proposed legislation bars most proprietary trading, some last-minute amendments work to water down the strength of the provision, allowing banks to make limited investments in private-equity and hedge funds.

When it came time to vote, 20 members of the House voted for the conference committee's proposal, while 10 voted against. In the Senate, it was seven votes for and five against the report. Now the rest of the Capitol gets to vote, with a goal of putting the measure on President Obama's desk by the Independence Day holiday.

The financial reform legislation is a big accomplishment for our vote-driven leaders, but only time will tell if it deserves the gravitas Washington is purveying.

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