September 03, 2010

Will Wall Street Reform Bring Salvation?

This week, financial advisors have been informed of some new disclosure and reporting rules.  As expected, the impact of the Dodd/Frank Bill is already foreshadowing a ridiculous amount of additional paperwork - mostly silly work as one of my colleagues would call it.  Financial regulation is a double-edged sword and changes were necessary, no arguments there. However, it is questionable to what extent investors will be better off, safer, and whether the financial system will any more stable after implementing the new financial overhaul bill. 

I had a chance to glance at some aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act but as soon as I opened this document, I had to close it again; I simply couldn't find the courage to actually read through some 800 pages of legalese.  So here is my offer:  I will buy anyone dinner who can muster up the courage to read this and give me a concise 20 minute plain English summary...

Going back to regulatory reform, my views are sadly quite cynical which is evident in the many references you can find in previous articles:

Market Insights 14-Feb-2009
Mark-to-Market or Mark-to-Myth?
It's all about Tim Geithner
Market Insights - 25 July 2009
Market Insights - 24 April 2010
Overhauling The Financial Services Industry – Really?

So what's it going to be after the dust settles and this monstrosity of an overhaul will eventually be implemented?  My take is that investors and the general public will have to foot the bill in one form or another.  Clients will loose out in having to pay higher fees. Smaller firms, such as our tiny practice, will find it increasingly difficult to swallow the cost of dealing with regulators and may be forced to team up with a larger firm, losing some of their coveted independence. Already overregulated jurisdictions such as the US and the UK must carefully evaluate what's at stake.  In the UK, several banks have been warning that they might relocate to business-friendlier jurisdictions.  HSBC just announced its clearest warning over relocation, warning that it might relocate its headquarters to Hong Kong.

The choice for many of these institutions is clear as well; they will be following the money and economic growth which has been in emerging markets.  London hosts the investment banking headquarters of many international financial institutions including some high profile US and German banks.  If those divisions can operate from London, why can't they move their investment banking headquarters to Hong Kong, Singapore or other jurisdictions that would give incentives to operate at substantial cost savings? 

While US investors must wait until the Dodd/Frank Bill is implemented to find out whether salvation is nigh, capital won't.  As the markets and institutions assess the impacts of new reform, we are going to be faced with a very different financial landscape in the near future. Investors might then also need to assess whether it makes more sense to "follow the money".

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