6/23/2010
By Lawrence G. McDonald, Pangea Capital Management

This is very interesting new color out of Washington having a big impact of all the major Financials globally.

In Paris today.  I spoke yesterday at the French American Foundation in Paris http://bit.ly/c2lTgw  .  I'll back in Monaco on the 28th for the Fund Forum http://www.icbi-events.com/fundforum/ and speaking at the European Business Summit in Brussels on 6/30 http://www.ebsummit.eu.

Here's my take on the latest out of Washington.  If you want to call it a heavy weight fight between the Obama Administration and the Wall St. lobby machine, the president and his team are taking some hits this week, maybe even a cut above the eye.

The $450 million spent by the street over the last 18 months may be paying off?

1. The all important Levin Merkley language inside the Volker Rule is getting watered down.

- a two-year phase-in looks likely now, despite a push by Senators Levin (D-MI) and Merkley (D-OR) to make proprietary trading reforms immediate.

- full phase-in might not occur for up to seven years in order to protect against a "fire sale" of any required divestments.

To me, it's very important to understand this part of the legislation.  Abuse of Prop Trading brought down Lehman, Bear Stearns, Morgan Stanely and Merrill.

2. Banks owning Hedge Funds and Private Equity Firms

- now appears likely that banks will be able to keep these investments.

3. Derivatives, Lincoln Amendment continues to loose teeth.

- Two year phase in now looks likely.

- Looking like credit Default Swaps will be allowed to be held in a separately capitalized Bank Holding Company within a big commercial bank. Originally this was expected to be a true spin off.  Of course no specifics on actual capitalization requirements yet, which means this is an active battleground.

- Too big to fail language still alive allowing the Federal Reserve to bail out a bank holding company in trouble with their derivatives book. Government protections for troubled swaps businesses are still under discussion. The Federal Reserve could use emergency powers in the event that a swap entity's failure posed systemic risk.

4. Ratings Agencies, Al Frankin Amendment

- Two year "study" picking up steam, what a shame!

Lawrence G. McDonald
Managing Director
Pangea Capital Management LLC
350 Madison Avenue, 8th Floor
New York, NY 10017

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