Market reaction muted to Obama speech; analysts caution there still could be long-term impact

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Markets react little to Obama financial speech

NEW YORK — President Barack Obama took his fight for financial services reform to New York Thursday and got little reaction from investors.

Major stock market indexes did regain some ground after Obama’s speech urging congressional passage of a financial regulation overhaul bill. But analysts said investors had done some cautionary selling before the talk at Cooper Union college. They reversed those bets when there were no unplesasant surprises in the president’s address.

“It’s a wait and see mode,” said Paul Miller, head of financial institutions research at FBR Capital Markets. Miller said Obama’s speech was aimed at pressuring Republicans who might be against financial reform and to win support from the general public.

“The momentum is moving very, very quickly to a tougher bill,” Miller said.

The president’s speech came less than a week after the Securities and Exchange Commission filed civil fraud charges against Goldman Sachs Group Inc., saying the bank misled investors about securities tied to subprime mortgages before the credit crisis began.

Analysts say any reform could eventually affect the market. But until a final bill is passed and rules are implemented, there is no way to know for sure how big an impact it will have on financial markets or the banking industry.

“The more details emerge, the more Wall Street will price it in, for better or worse,” said Michael Farr, president of Farr Miller and manager of the Touchstone Capital Appreciation Fund. “Wall Street is becoming accustom to policy risk,” and continually pricing it into stocks, Farr said.

He noted that during the health care reform debate, investors were continually factoring news developments into stock prices.

The Obama administration and critics of the banking industry blame lax government oversight and risky trading by the big financial firms for pushing the country into recession and creating the credit crisis.

On Tuesday, Citigroup Inc. CEO Vikram Pandit told shareholders at the bank’s annual meeting that he supports reforming financial regulation and oversight. Citigroup was one of the hardest hit banks during the credit crisis and has lost billions of dollars due to failed investments and consumer loan and mortgage defaults.

Obama said reform is necessary so “we don’t doom ourselves to repeat” history. He said that if a reform bill is not passed, the banking industry would make the same mistakes that helped push the economy into its worst recession since the Great Depression.

Among other things, the legislation would restrict the trading of derivatives and other risky but potentially lucrative investments. It would also limit the size of big banks.

“The real wild card is derivatives reform,” said Michael Torres, CEO of Adelante Capital Management. How far regulations go toward restricting or changing derivatives trading is what will affect banks the most, Torres said.

The securities in the Goldman Sachs case, known as collateralized debt obligations, are some of the derivatives products banks created during the housing boom that later plunged in value and contributed to the credit crisis.

New rules could force banks to trade derivatives on open exchanges like stocks and bonds. They currently are done in private deals, and there is no central agency or database to track the deals.

“Even a bookie writes down his bets,” Farr said.