Fin Reg: Wall Street Wins Decisively

by Jacob Zamansky on June 25th, 2010 at 4:41 pm : Comments 000

If you want to know who got the upper hand when it comes to the Financial Reform Bill, follow the money. Bank stocks are currently trading higher and financials are out-performing all other sectors. As Dick Bove, a high-profile analyst that covers Wall Street put it, “I think I would be buying bank stocks this morning.”

That’s because the Financial Reform Bill Washington is touting didn’t protect investors in any substantive way. Congress failed to address the Supreme Court’s “Stoneridge” decision, which would have afforded investors protection against Ponzi Schemes and other large scale frauds commonly aided and abetted by large financial institutions. And don’t let the headlines fool you, Congress totally punted on the requirement that brokers put their clients’ interests ahead of their own - the so-called “fiduciary” standard. Failing to address these two issues is a one-two punch in the gut for investors.

As I previously predicted, Wall Street was able to stonewall the Stoneridge provision. A few members of Congress initially used the issue to garner some good press, but in the end they caved to Wall Street’s pressure. Had they stood up to the industry’s powerful interests, a provision to combat the Stoneridge decision at a minimum would have forced investment banks, accounting firms and other “gate-keepers” to perform a reasonable amount of due diligence on those they choose to do business with. For example, if a bank knew it could be held liable for actions related to its dealings with a convicted felon, do you really think they would risk litigation in order to make a few shekels? I think not, but as it stands, firms can act with near impunity and support criminal activities knowing they are afforded protection by the Stoneridge decision.

As for the fiduciary standard, time will tell whether the members of Congress that loudly supported the standard will regret caving and agreeing to “study” the change’s effect. Apparently it didn’t matter that the SEC already studied the fiduciary standard and found that investors didn’t know when they were getting actual financial advice as opposed to being sold a product.

Without a Congressional mandate, it’s unclear whether the SEC will have the gumption to make an investor-friendly decision and adopt the standard broadly. Though Chairman Mary Schapiro very publicly has endorsed the wide adherence to the fiduciary standard, the SEC is currently very divided. SEC investigators were only authorized to file charges against Goldman Sachs after SEC Commissioners voted 3-2 along party lines. Indeed, getting SEC’s decision makers to agree on anything is an uphill battle to say the least.

It’s actually a pretty sad day for investors, yet without a doubt some are seeing short term gains as a result of Congress’ gift to Wall Street. Long term, however, Wall Street has gained the upper hand and has shown Washington who’s in control.

Filed under FINRA, Uncategorized, Wall Street