Wall Street got rescued from another day of steep losses Tuesday by an unlikely source: House Financial Services Committee Chairman Barney Frank.
The Dow Jones Industrial Average was on course to register a drop of as much as 200 points and end below 10,000 when the Massachusetts Democrat said in midafternoon what the markets have been hoping to hear all week: that he will insist on enacting the House's milder version of key financial reforms when the House goes to conference with the Senate next month.
Mr. Frank's suggestion that he will resist, in particular, a Senate provision that would force Wall Street banks to divest their derivatives businesses because it "goes too far" was all it took to nearly erase the day's losses on Wall Street.
The Dow ended down a mere 23 points, at 10,044, lifted by improving prospects for battered banking stocks such as Morgan Stanley, Bank of America and Goldman Sachs. Those firms stand to lose as much as 30 percent of their profits and revenue under the Senate bill by some estimates.
The episode highlights a hugely ironic development stemming from the populist storm against Wall Street in Congress. In years past, the financial industry often vilified Mr. Frank for his liberal views and support for what the industry considers meddlesome government regulation.
But after weeks of debate in the Senate, during which legislators seemed to compete to see who could be toughest on Wall Street, many industry insiders today view the longtime House chairman as a "moderate" and their best hope for getting a bill that does the least damage to the financial industry.
"He's really a reasonable guy. And he's very smart," said W. Todd Groome, chairman of the Alternative Investment Management Association, which represents the international hedge-fund industry.
While some analysts have speculated that hedge funds would benefit from the Senate provision because they would pick up business from banks that can no longer provide swap services directly to their clients, he said most hedge funds really do not want to be in that kind of business.
Hedge funds are focused on making money for wealthy clients rather than providing services to corporations that need to use derivatives as hedging devices to protect their businesses against such adverse events as a major change in the direction of oil prices or interest rates.
Like many on Wall Street, Mr. Groome endorsed the House reform bill, passed in December, as more "reasonable" and "intelligent" than the Senate bill passed last week and said he hopes it prevails in a House-Senate conference that will start after Memorial Day recess.
The controversial Senate provision was authored by Senate Agriculture Committee Chairman Blanche Lincoln, an Arkansas Democrat who is in a tough primary election fight with a more liberal Democrat favored by labor groups that are pushing for a harsh regulatory crackdown on Wall Street.
Mrs. Lincoln has insisted that she will defend the provision in conference. However, she faces opposition from other key quarters in addition to Mr. Frank, including the Obama administration, Senate Banking Committee Chairman Christopher J. Dodd, Connecticut Democrat, and an array of regulators who say the provision may inadvertently drive derivatives trading offshore to foreign financial centers.
The dramatic effect Mr. Frank's comments had on the stock market Tuesday lends credence to analysts who say a major reason for the market's nearly 12 percent loss in value in recent weeks has been fear of overreaching government regulation spawned by the Senate debate, not just worries about the European debt crisis.
"We believe that financial reform poses a greater risk to [financial] industry profitability than European exposure," said Frederick Cannon, analyst at Keefe, Bruyette & Woods.
Large U.S. banks and brokerages have little to fear from the European debt crisis because they have strong capital reserves and relatively small debt holdings in Greece and other European countries compared to European banks.
On the other hand, U.S. banks and other corporations would be hurt if the European crisis led to a renewed recession in Europe and weaker global growth, he said.
That is the specter that haunted markets yesterday, until they were cheered by Mr. Frank.
James Bullard, president of the Federal Reserve Bank of St. Louis, sought to reassure markets about the outlook for the economy, pointing out that the U.S. has never been driven into recession by a foreign country defaulting on its debts.
The European turmoil "will probably fall short of becoming a worldwide recessionary shock," he said in a speech in London, citing the example of the economy's resilience after Russia's default in 1998.
No Western European country has as yet gone into default in the current crisis, but many analysts expect Greece eventually will be unable to cope with its debt and will have to restructure it or selectively default in coming months.
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