There has been plenty of talk that the Goldman Sachs fraud indictment will strengthen the chance of the Obama administration overhauling Wall Street. But given the revolving door between Wall Street and Congress, there's every chance those reforms will be toothless.
Colin Barr at Fortune says the Goldman Sachs case might just improve the chances of Senator Chris Dodd getting his legislation through. As you would expect, the Republicans oppose the changes but Barr says the ground could be shifting. "The alleged misdeeds of Goldman, which has become the face of overpaid Wall Street slicksters, could make it painful for moderate Republicans to stand with the banks. Many face building anti-incumbent sentiment in November's congressional elections," Barr writes.
Certainly, the allegations from Rabobank that Merrill Lynch was doing exactly the same thing as Goldman Sachs suggests the Goldman Sachs chicanery was common practice on Wall Street.
But then, would Dodd's legislation do any good? No it won't says Reihan Salam at the Daily Beast.
The big debate is over the regulation of derivatives, all part of the shadow banking system that created the meltdown. Treasury Secretary Timothy Geithner says these need to be cleared centrally. The banking industry is fighting tooth and nail against any changes. That's hardly surprising when BusinessWeek tells us that this unregulated market generated an estimated $28 billion for five U.S. dealers including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley and that regulating them could cost JP Morgan $3 billion a year.
We need to control the $300 trillion market for derivatives, the complex financial contracts nearly brought down AIG and destroyed Lehman Brothers. Derivatives are not like ordinary stocks and bonds. They are not traded on exchanges, so nobody really knows what is going on. So when AIG nearly goes broke or Lehman Brothers collapses, nobody can tell how big the problem is and who next it will affect. Without that information, markets panic. When that happens, the entire financial system can collapse within a matter of days. There can only be one solution: all derivatives need to be traded on exchanges.
The big question is whether derivatives will be reined in. If they're not, we are in for another meltdown.
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