United States Senate goes a long way

The Wall Street Reform bill passed last night by the United States Senate goes a long way toward reining in the reckless casino economy that cost eight million Americans their jobs, and brought our economy to its knees.

But its passage signals an even more significant shift in the economic assumptions and power relationships that undergird American political and economic life.

For four decades Wall Street had its way with American government. The big Wall Street banks and their economic apologists dominated the main stream of economic thought - and their army of lobbyists called the shots on Capitol Hill. Last night their domination came to a screeching halt.

Wall Street's minions - and their Republican enablers - did fend off many proposals that would have strengthened the bill that passed last night. But, contrary to conventional wisdom, as the original Wall Street Reform bill moved from the House to the Senate - and then to the Senate floor - the bill actually got tougher.

The bill that pased the Senate includes provisions detested by the biggest Wall Street banks that would prevent them from trading in derivatives - the economic time bombs that were at the center of the 2008 financial collapse. That provision alone would cost the big Banks $40 to $50 billion in profit.

As the bill moved through Senate debate, provisions were added to place new restrictions on credit rating agencies, limit fees that credit card companies can charge to merchants, and force big banks to maintain higher capital requirements.

Wall Street failed in its attempt to stop a new Consumer Financial Protection Bureau that would protect borrowers from many of the abusive and fraudulent financial practices that lead to the economic collapse and siphoned billions -- from the pockets of those who work in the real economy -- to the bloated financial sector.

In the final hours of the debate, Republicans made one last attempt to exempt auto dealers from consumer protection rules when they make auto loans. They couldn't manage to get the provision to a vote.

The reason for their change in fortunes is simple. Wall Street is toxic. Support for Wall Street is becoming another third rail in American politics. Even the Republicans justified their defense of Wall Street in Orwellian terms that made it appear they were attacking their Wall Street sponsors. Democrats found that attacking Republicans for supporting the Wall Street banks was like shooting fish in a barrel.

The economic collapse, the taxpayer bailout, and then their subsequent return to business as usual - to the same old recklessness and greed -- have sickened everyday Americans. Now the chickens are coming home to roost. Or to put it another way: the pigs get fat, the hogs get slaughtered.

Not that it's time to have a tag day for the "ten million dollar bonus" crowd. And Wall Street's army of lobbyists will do everything they can to weaken the final bill in House-Senate conference. But a significant turning point has been reached. The notion that the "geniuses of Wall Street" know best - that they should be left on their own to suck up as much of the nation's wealth as possible because it serves the "common good" - that dog will no longer hunt.

In 1792, the nation suffered its first credit crisis. Financial crises recurred in the United States roughly every 15 years until the Great Depression. Then New Deal reforms changed the game. The Security and Exchange Commission instituted tough new rules for the stock market. The Federal Deposit Insurance Corporation provided stability to the nation's banks - and its means of allocating credit to the real, productive economy. And the Glass-Steagall Act created a firewall between banking and the risky speculative activities that had - in large measure - caused the credit collapse that led to the Great Depression.

For the next fifty years America had uninterrupted economic growth - with no recurrence of financial meltdown. That ended when the resurgent "markets-know-best" conservative economic movement led to the deregulation of the savings and loan industry. Undaunted by the bust that followed the savings and loan disaster, Wall Street successfully pushed to repeal Glass-Steagall - and prevent the regulation of its new "innovative" esoteric derivative securities. The casino economy and financial sector exploded.

During the period 1973 to 1985, the financial sector never earned more than 16% of domestic profits. This decade, it has averaged 41% of all the profits earned by businesses in the U.S. In 1947, the financial sector represented only 2.5% of our gross domestic product. In 2006, it had risen to 8%. In other words, of every 12.5 dollars earned in the United States, one dollar goes to the financial sector, much of which, let us recall, produces nothing.

Wall Street's expansion is one big reason that most of America's economic growth during the last decade has flowed into the hands of investment bankers, stock traders and partners in firms like Goldman Sachs. The Center on Budget and Policy Priorities reports that fully two-thirds of all income gains during the last economic expansion (2002 to 2007) flowed to the top 1% of the population. And that, in turn, is one of the chief reasons why the median income for ordinary Americans actually dropped by $2,197 per year since 2000.

The passage of Wall Street Regulatory Reform symbolizes a fundamental change in the political power of Wall Street, and a collapse of the economic and political narrative that it used to justify its confiscation of an ever-growing portion of the economic pie.

Wall Street is in political retreat. But the most important lesson of politics is that when they're on the run, that's the time to chase them. Progressives - and all advocates for the interests of everyday working people - need to make sure that we consolidate our victories as the Wall Street Reform bill goes to conference. And once that is done we should continue the crusade to limit the size and power of the financial sector, and redirect resources to the people in our economy who actually create the goods and services that generate widely-shared economic growth.

Financial stocks turned higher Friday as some uncertainty was removed with the U.S. Senate's passage of its version of a financial-overhaul bill, though investors are still concerned about what the final bill will include and continue to grapple with ongoing fears about the debt crisis in Europe.

Investors have been in limbo for months, wondering what provisions will be in the final law. The Senate still needs to reconcile its bill with the one passed by the House in December. But the Senate's passage of its measure does offer a little more clarity because its bill had undergone a multitude of changes and amendments while it was up for debate.

A lot of the uncertainty is over, which should give the stocks some immediate relief, First American Funds analyst Alan Villalon said, but investors are still wondering about some pieces of the legislation, including the parts on derivatives, capital requirements and the Volcker rule, which would curb lucrative proprietary trading practice at most banks. The Senate's version of the bill also contains a contentious provision that would require banks to spin off their derivatives-trading businesses.

There is "a lot of concern" about how much time the banks are going to have to spend implementing the changes under the financial regulations as opposed to time spent focusing on a recovery, he said.

The financial sector of the Standard & Poor's 500 was recently the best-performing sector, up 1.6%.

Morgan Stanley (MS) led gainers among the big banks, rising 3.7% to $26.60, while Goldman Sachs Group Inc. (GS) climbed 3.5% to $140.91, J.P. Morgan Chase & Co. (JPM) rose 3.3% to $39.08, Citigroup Inc. (C) gained 1.9% to $3.70 and Bank of America Corp. (BAC) increased 1.7% to $15.55.

"People are hopeful that some of the harshest things...are actually softened in the reconciliation process" with the House, Morningstar analyst Matthew Warren said. But that won't be clear for another month or so, he said, and uncertainty is going to remain and continue to weigh on the stocks as different elements get added and subtracted to the legislation.

In addition to the still-fuzzy outlook for new financial-system regulations, the precarious fiscal condition of several European countries has also weighed on financial stocks. Economists have worried about government defaults on debt in countries such as Greece, Portugal and Spain, and investors continue to be unsure which U.S. banks, if any, could suffer losses from troubles in Europe. Bank of America and J.P. Morgan Chase each reported holding less than $2 billion in exposure to Greece as of March 31, which J.P. Morgan called "modest."

Investors are worried about the euro-zone news because the recovery in the U.S. is very sensitive, and a major crisis there could cause the U.S. to double dip into another recession, Villalon said. And the fact that U.S. banks will be busy restructuring under new financial regulations makes it more difficult for them to separate themselves from Europe, which they need to do to keep the U.S. recovery going, he said.

The Senate's passage of the reform bill has some clear negatives for ratings agencies Moody's Corp. (MCO) and McGraw-Hill's (MHP) Standard & Poor's, but no provisions are "terminally threatening to the economics of the industry," Piper Jaffray said. "Resolution of regulatory uncertainty should ultimately serve as a catalyst to higher multiples on the shares of [Moody's] and [McGraw-Hill] as we are better able to quantify the cost associated with regulatory reform," the firm said. Lowering the threshold for legal liability is one of the biggest negatives, but the firm said even that is "not a 'game changer'."

Moody's was recently up 2.3% to $21.69, while McGraw-Hill edged up 0.8% to $28.28.

Meanwhile, Janney Capital Markets upgraded MasterCard Inc. (MA) to buy from neutral, saying the shares will benefit from multiple expansion as investor sentiment begins to improve after the Senate passed its bill. MasterCard and other credit-card stocks had rallied Thursday as well after the failure of a proposal that would have allowed individual states to impose interest-rate caps on cards. MasterCard and Visa Inc. (V), the card network companies, rose 3.8% to $213.33 and 3.3% to $75.25, respectively, while card issuers Discover Financial Services (DFS) rose 1.7% to $13.26, American Express Co. (AXP) edged up 0.3% to $38.73 and Capital One Financial Corp. (COF) was up a penny at $41.34.