Good news on the economic front for the first quarter of 2013 was clouded with mixed results on housing sales and disappointing data from the durable goods sector. The markets have fared well over the past month or so. For the week ending April 26, the Standard & Poor’s 500 index rose to 1,582 – for a year-to-date total return of about 11.6 percent. The annual rate of GDP (a broad means of measuring the goods and services produced by the United States and a measure of the nation’s economic growth) was up 2.5 percent (annualized) in the first quarter. Government economists noted that the results were provisional and as yet incomplete. The increase was positive following the very modest 0.4 percent scored in the last quarter of 2012, but it failed to cheer economists who had set their sights even higher. An increase in consumer spending and inventory replenishment helped the expansion. Government spending declined (0.8 percent versus 1.4 percent for the last quarter of 2012). Existing home sales declined slightly, but new home sales rebounded. Although it’s inconsistent, economists concluded that we are seeing growth – albeit at a slower pace than we’d like to see.

Changes in Big Bank Regulation

Individual investors who suffered as a result of the financial debacle in 2008 will be interested to note that a new bipartisan bill emerged at the end of April. This legislation is called the Terminating Bailouts for Taxpayer Fairness Act and, as its name suggests, it is designed to protect taxpayers and individual investors from similar catastrophic bailouts in the future. The bill would create a new, transparent set of capital rules for the nation’s banks – a system in which the banks would create a proper “prudent reserve” to protect themselves against large losses.

It’s the early days for the bill, which already has aroused significant opposition from the nation’s largest banks. The bill’s co-sponsors – Senators Sherrod Brown (Dem.) and David Vitter (Rep.) – don’t underestimate the resistance it will meet. Both believe significant risks still remain in the banking system. The Senate already has held a non-binding vote to end the “too big to fail” subsidies or funding for Wall Street’s big banks. It received 100 percent support. Now the senators will have the chance to solidify their position by supporting the Brown-Vitter bill.

Looking Ahead

Any investment pro will tell you that it’s impossible to predict the market. However, it’s fair to say that individual investors and gurus alike all know that problems with big banks are usually felt quickly down on Wall Street. With this in mind, investors might be interested to know that the special council of bank regulators – the Financial Stability Oversight Council – attempted to do some crystal ball gazing at the end of April. Their purpose was to compile a list of best guesses as to what might precipitate a future financial crisis. The session resulted in a long list. Here are some of the key issues:

• Big banks borrowing more – and more cheaply – with the assumption that government will bail them out. Like the Senate, the FSOC continues to suspect that banks might still be inclined to take on too much risk.
• A sudden rise in interest rates could cause losses at the banks. The FSOC believes that banks have more capital than before, and the committee is not overly concerned with this issue.
• The risk of recession and economic slowdowns in Europe, Japan and China remain a concern.

In a future report, the FSOC plans to identify specific financial institutions that are of such significance that their failure could engender a future financial crisis.

These efforts, along with oversight procedures that evolve to keep pace with the way business is conducted today, can only help strengthen U.S. markets and provide support to those who invest in them.

The comments above are general commentary and are not a substitute for specific advice from tax and investment professionals.