Financial sector frets reform may hit business

By Paritosh Bansal and Megan Davies

BEVERLY HILLS, California (BestGrowthStock) – Financial services executives are apprehensively watching regulation reform make its way through Washington, worried measures such as a bailout fund and restrictions on derivatives would hurt business.

But executives, investors and advisers at the Milken Institute’s Global Conference agreed on the need for reform of financial regulation to prevent crises in the future.

“We need a bipartisan bill here because we need both sides to contribute their best ideas to this reform. And we need reform,” said Kenneth Griffin, the chief executive of hedge fund Citadel Investment Group. “It will hurt business if we end up with poor legislation.”

Indeed, the future shape and profitability of the banking industry (Read more about the banking industry recovery.) hangs in the balance on the most sweeping overhaul of U.S. banking rules since the Great Depression, which is making its way through Congress now.

Mohamed El-Erian, co-chief investment officer of Pimco, which manages the world’s largest bond fund, said the banking system “is on a journey toward being much more utility-like because the benefits of stability today are being viewed to exceed the benefit of efficiency.”

“No society can accept a system that privatizes massive gains and socializes massive losses,” El-Erian said. “And therefore there will be a reaction, and history tells you that’s likely to be an overreaction.”

The debate was energized after the Securities and Exchange Commission sued Goldman Sachs Group Inc for fraud, charging the bank hid vital information from investors about a subprime mortgage-linked security.

REGULATORY ARBITRAGE

The measures being debated include forming a consumer watchdog, barring banks from trading unrelated to clients under a so-called Volcker rule and devising a new process for dismantling troubled financial firms. It also would crack down on the unpoliced $450 trillion derivatives market that helped ignite the financial crisis.

Rodgin Cohen, a partner at Sullivan & Cromwell, said he was concerned there would be regulatory arbitrage, where risk moves either overseas or takes another form in the same country.

“Activity will flow to a point where it can be conducted with the least constraints and there is a danger of regulatory arbitrage,” Cohen said.

But Cohen said Wall Street would still be the center of the financial world.

“One of the reasons I’m hopeful we’ll see financial reform legislation enacted is that it will demonstrate to the world that we have the political will to say we are going to try and prevent future occurrences,” said the lawyer, who is among the industry’s most trusted advisers.

Marc Lasry, CEO of hedge fund Avenue Capital Group, said restrictions being proposed on derivatives will change how they invest.

“For firms like us, where you are trying to reduce risk and you are trying to reduce volatility, it’s going to be hard,” Lasry said. “That’s going to be a fact of life.”

Other measures, such as a $50 billion bailout fund to pay for an “orderly liquidation” of large firms in distress are also coming under fire.

“There should not be a bailout fund for large banks. This is preposterous,” Griffin said.

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(Editing by Tomasz Janowski)

Financial sector frets reform may hit business