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Goldman Sachs' case may unite Democrats and Republicans in U.S. financial reforms

Tuesday, April 20, 2010
Opalesque Industry Update - The fraud allegations against investment bank Goldman Sachs by the Securities and Exchange Commission (SEC) have not only given the proposed U.S. financial reforms momentum, but may have also provided the Democrats and Republicans a reason to unite to draw up a rigid financial restructuring, various media reports said.

Three days after the fraud charges against Goldman Sachs reverberated down Wall Street (see yesterday’s story here), the White House announced that President Barack Obama had asked the Senate to “swiftly” act on the financial-regulation bill.

Obama is to fly to New York on Thursday and delivery a speech at Cooper Union, a New York school, to “remind Americans what is at stake if we do not move forward with changing the rules of the road as part of a strong Wall Street reform package. “ His speech will take place the day the Senate Democrats plan to bring the reform bill to the floor for deliberation, said Reuters. The debate on the bill is expected to commence next week.

A report by DWNews said that there was no doubt public opinion towards Wall Street and big banks plunged to its lowest, which may work to unite Republicans and Democrats to agree on a reform package. The two sides have been at odds over the proposed bill.

Democrat proposal
The Democrat Senate bill is similar to the one passed by the House last fall. Proponents of the measure pointed out that the bill would shield Americans from shady credit card fees, protect taxpayers from financial bailouts, save banks from becoming “too big to fail,” police hedge funds and safeguard the country from future economic crisis.

But the Republicans contend that the bill could lead to future government bailouts, which according to latest surveys, is not acceptable to most Americans.

Democrats to close partisan divide
Having found an opening to “rush” financial reforms, Democratic leaders wasted no time trying to peel away the Republican votes to push for the passage of the reform bill. The Democratic leaders are exploiting the Goldman Sachs controversy, said Washington Post, to paint the Republicans as out of touch with the concerns of average Americans. On the other hand, the Republicans argue that the bill is some form of “bailout” that would cost American taxpayers billions.

Last Friday, 41 Republican senators sent a letter to the Democrats to express their “opposition to the partisan legislation,” describing the financial reform bill “as allowing” for endless taxpayers bailouts of Wall Street.”

While the bill provides a consumer protection agency to monitor mortgage lending and credit card transactions, as well as regulate the complex derivatives market for the first time, it requires the creation of a $50bn fund for unwinding troubled banks.

Because of the backlash regarding that fund, Obama told the Senate Democrats to drop it from the financial reform bill so as to remove objections from the Republicans.

Geithner confident of financial overhaul, Republican support
Last Sunday, U.S. Treasury Secretary Timothy Geithner declared that the U.S. Senate was very close to forging a strong regulatory bill.

He also said he was “very confident” that the Obama administration would get sufficient support from the Republicans to pass the reform measures.

Hedge funds worry financial reform could inflict more damage
The financial reform bill will have a major impact on hedge funds, which is causing concern among industry experts. An exclusive report published in Opalesque quoted U.S. fund managers saying that the impact of the bill would be more costly that the benefits to both managers and investors (See Opalesque Exclusive: As the US expresses worry about hedge fund protectionism in Europe, domestic regulators may inflict more damage here).

Mitch Nichter, partner at international law firm Paul Hastings warned the SEC might resort to overregulation. This, as many managers have already accepted the fact that hedge fund regulation would become the rule once the reform package is passed into law.

It seems that the fears of the managers are not unfounded; Senator Blanche Lincoln proposed on Monday to raise capital requirements of hedge funds. She suggested imposing mandatory clearing requirements on hedge funds. She wants to classify some hedge funds as “major swaps participants,” a designation that would ensure increased regulatory monitoring, mandated clearing and higher capital needs.
- Precy Dumlao

See last month’s Opalesque Exclusive: Regulatory roundup: Current U.S. law, commodities, tax developments affecting hedge funds Source


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