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The Reformation of Wall Street

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Offering from Geithner, Summers is a Trojan horse -- not an olive branch.

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Yesterday, playing the role of Martin Luther, Messers Tim Geithner and Larry Summers nailed their "95 Theses" (okay, 90 fewer than that) to the op-ed page of the Washington Post, publicly declaring the beginning of the Wall Street Reformation.

To put it simply: Martin Luther, they're not. And candidly, there was little in the op-ed to suggest that our period of "indulgences" is over. No, as I joked with friends yesterday, the only thing that was certain from the op-ed was the determination that health-care reform must be passed by Congress.

Having gone through the bureaucracy and the mind-numbing complexity of General Motors (GRM) like a knife through butter, it was surprising to me to see this same team capitulate in the face of what seems like obviously needed regulatory reform.

So what should we take away from this?

First, and in all seriousness, the Obama Administration really does have healthcare first. And I doubt that anything meaningful will be accomplished on financial-industry reform until there's some form of national health coverage passed by Congress.

Second, history suggests that all meaningful financial-services reform must come from Congress, not the White House. And in this regard, I'd remind readers that Messers Glass, Steagall, Gramm, Leech, and Bliley all hung their hats on Capitol Hill. And until I see a bill introduced under the names Frank and Dodd, I'm holding my breath.

Having said all that, and with all due respect to members of Congress, most of what Messers Geithner and Summers proposed really doesn't need Congress's approval in the first place. Increased capital and liquidity requirements are coming, with or without help from the legislature. Similarly, a lot of the macro-systemic risk-management issues being targeted for the Fed, already exist there. And I can easily see "counter-cyclical" capital requirements being used to limit risk-taking at large bank holding companies -- again, without congressional approval.

On the consumer-credit-protection front -- and the "skin in the game" securitization plan -- there are things that make intuitive sense. (In this regard, I'd highlight that neither auto nor credit-card ABS -- where issuers have always had skin in the game -- had nearly the manipulation that the loan-mortgage market, or dare I suggest, commercial-mortgage market had.)

But I'd also offer that since both rules are principally targeted to the mortgage market, they're likely to seriously reduce the ability of small mortgage originators to compete. And with Washington already concerned about things "too big to fail," I have my doubts as to how willing Congress will be to effectively put all US mortgage origination in the hands of JPMorgan (JPM), Bank of America (BAC), and Wells Fargo (WFC).

Finally, to anyone worried that the appeal of Messers Geithner and Summers for "strict international standards" represents a cowering to foreigner financial regulators, I'd offer that the pitch is more Trojan horse than olive branch. Both gentlemen are well aware of European banks' dependence on hybrid capital. And with the US having moved to Tier 1 Common Ratios as the measure of bank solvency (and with the raising/converting of almost $100 billion of new common stock in the process), application of the same measure in Europe would clearly put those banks on the defensive.
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Position in SKF, SPY, and JPM.
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