Washington Update , Dodd overhaul bill, Market Internals

Washington Update

· There are three major themes from Washington this week: 1) the proliferation of investigations into Wall St firms and activity around CDOs, muni debt, and other products; 2) the Dodd overhaul bill and its various amendments; 3) the May 6 market plunge and uncertainty w/new circuit breaker rules. 

· Investigations – there were several reports this week in various papers (WSJ, NYT, etc) talking about how the SEC, Federal, and state investigators were looking into a bunch of Wall St firms and the role they played during the ’07-’09 credit crisis.  The initial SEC charges against Goldman at the end of Apr really marked the start of this broader market sell-off although the group (and Goldman shares) have stabilized somewhat as the inquiries broadened out to encompass more firms and activities.  On Fri the NYT had an article talking about how some Wall St firms are thinking about pursuing a global settlement similar to the research scandals of earlier this decade. 

· Dodd overhaul bill – this legislation continues to work its way through Congress although there has been a proliferation of amendments from both sides of the aisle.  The most notable this week were the Franken rating agency add-on and the Durbin debit interchange fee proposal (the former weighed on shares of the agencies MHP and MCO while the later hit MA, V, AXP, COF, and others).  There are still a few more major issues to get through, inc. the “Volcker Rules” (some, inc. Sen Levin, have been pushing for tougher versions of these bills), the fiduciary provision (which would force market makers into being fiduciaries on behalf of their clients), and the Lincoln swaps trading amendment.  Sen Dodd this week warned that there are too many amendments being proposed and that they could ultimately wind up destroying the bill.  Sen Reid apparently wants to push for cloture this Mon and end debate, although members of the GOP want more time spent.

· Market Internals – the May 6 market plunge still hasn’t been adequately explained and the main exchange regulators (CFTC and SEC) are being pressured to take action.  CNBC is reporting that new circuit breaker rules could be handed down as soon this Money, which is sparking worries that HFT business models could be disrupted and liquidity hurt (the Washington pressure on Wall St could wind up hurting liquidity – Bloomberg reported late on Fri that GS would end proprietary trading in CLO debt).