Mar 12, 2010

"Senate Banking Chairman Chris Dodd announced yesterday that bipartisan talks on financial reform have broken down, and he'll now introduce a Democratic bill on Monday. That strikes us as good news because it probably reduces the chances that a rushed and ill-thought reform will pass this year.

A year ago we were told a broad systemic reform had to pass quickly to rescue a teetering financial system, but that urgency has receded. Thanks to the Federal Reserve's extraordinarily low interest rates, banks have been able to make money riding the yield curve as they work off their bad loans.

Most banks have repaid their TARP money, and the Fed has been able to roll back its many new discount-window facilities. Even Citigroup CEO Vikram Pandit, whose bank is still a ward of the Treasury, managed to sound a bullish note this week. Credit markets continue to normalize, save for small business, which depend on small- and medium-sized banks that are still reluctant to lend to customers when they can make easier profits on the interest-rate carry trade. But this is not a problem legislation can solve."

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