WASHINGTON (Reuters) - The U.S. Congress is likely to back the thrust of President Barack Obama’s surprise new bank reform plan, according to the political calculus in Washington, but months of unpredictable debate lie ahead.
The proposals — which upped the stakes on financial regulation reform and pounded bank stocks — build on ideas that lawmakers have been thrashing out since the 2008 capital market crisis, the recession and the bank bailouts.
Big banks — JPMorgan Chase (JPM.N), Goldman Sachs (GS.N), Bank of America (BAC.N) and the like — lie in the path of a political backlash that is pushing reforms forward, despite the resistance of the firms’ army of lobbyists.
Major regulatory changes are all but assured, analysts expect, given the approach of mid-term elections in November.
Until lawmakers work through the fine points, however, uncertainty will hang over the financial sector, with sharp swings in share prices presenting short-term opportunities for investors with a stomach for volatility.
Bank stocks fell sharply on Thursday when Obama announced his latest plan. On Friday, they were down again with the broad KBW Banks index .BKX off about 2.5 percent, but still up strongly from the depths of March 2009.
“The government seems to have a weekly plan ... which causes a day or two sell off, followed by a renewed rally as investors look beyond government plans,” said Frederick Cannon, an analyst at investment firm Keefe Bruyette & Woods.
“Thus, we continue to favor many large cap banks ... and believe that a sell off following a new government plan to punish the banks creates a buying opportunity.”
Longer term, large financial firms face profit pressures from higher capital standards as soon as 2012. Combined with a tightening regulatory regime, the sector is set for structural change. The White House’s proposals can only hurry that along.
The three-part Obama plan would limit the size of banks, restrict their proprietary trading, and sever their ties to hedge funds and private equity — all strategies rooted in a government push to reduce risk and close regulatory gaps.
“We believe that the proposed reform to eliminate prop desks and hedge funds from banks will gain strong traction in the Senate, and therefore has a higher probability of passage,” said Paul Miller, analyst at FBR Capital Markets Corp.
“However, the other elements of the package ... are less certain and may be left to regulators rather than imposed by a Congressional mandate,” Miller said, referring to the so-far ill-defined size limitations being urged by the White House.
Obama and the Democrats suffered a blow this week with the Republican victory in Massachusetts’ special election, but it only convinced them to double-down on their anti-bank rhetoric, a factor contributing to Thursday’s bank plan announcement.
While Republicans spun the election as a referendum on Obama’s healthcare plan, Massachusetts signaled deep voter dissatisfaction with the financial system and the economy.
That political tide will make Republicans’ loyalty to Wall Street increasingly untenable as November’s mid-term elections approach, driving them toward accepting some reforms to avoid being painted as obstructionists by the Democrats.
As tempting as it will be for Democrats to follow that political logic to its end, the need for the administration to go into November with an achievement also points to compromise and, likely by this summer, financial regulation reform.
“The political climate for the mega banks is getting worse by the day,” said Jaret Seiberg, a financial services policy analyst at investment advisory firm Concept Capital.
“Democrats appear intent on forcing Republicans to rush to the defense of the mega banks or to accept onerous limits on their activities. For the mega banks, this is a horrible political position and it ... leads to onerous legislation.
“In addition, we do not expect this to be the end of the bank bashing. Democrats believe this works for the party. That means more presidential announcements in the weeks to come.”