April 28, 2010 for Medill Reports
by Josh Lederman

President Barack Obama explained in broad strokes to a downstate Quincy audience Wednesday the four points of his proposed financial reforms: accountability and ending bailouts, closure of loopholes on derivatives, consumer protections and shareholder say on executive pay.

But financial experts here said that some elements of the reforms, despite resistance in New York, may have unique benefits in Chicago.

“Times are tough in Quincy and towns like it across America,” Obama said to an enthusiastic home-state crowd. “It is why we need good, common-sense Wall Street reform today. Not next year, not some other time down the road. Now.”

On the issue of derivatives, which have been at the center of reform discussions on Capitol Hill – and yesterday’s Congressional hearings on possible fraud by New York-based Goldman Sachs Group Inc. – the president said that transactions need to be brought out of the shadows so risks to the economy can be exposed.

“We’ll close the loopholes that allowed derivatives deals so large and risky they could threaten our entire economy,” Obama said.  “And we’ll bring those deals out of the dark alleys of our financial system and into the light of day.”

Financial experts in Chicago said in advance of Obama’s remarks on Wednesday that increased regulation might actually be a plus here. Chicago is the center of exchange trading, where transparency is higher than in over-the-counter markets, which is how many derivatives are now traded.

Chicago’s exchanges outperformed Wall Street during the crisis.

“In a way it’s sort of a dog that didn’t bark,” said Dale Rosenthal, who teaches finance at University of Illinois at Chicago.“It’s a part of the financial infrastructure that worked.”

Rosenthal said the Chicago financial community is concerned about being lumped together with Wall Street, which has absorbed the scorn and blame of a nation angry over the depressed economy and subsequent bailouts that saved Wall Street, but have not yet restored normalcy to Main Street.

“I think there is overall a level of ignorance in the public about how different parts of the market performed,” Rosenthal said before Obama’s speech Wednesday. “We’ve heard a lot of doom and gloom about markets freezing up. That wasn’t universal. The exchange-based markets [in Chicago] continued to function.”

Rosenthal said some of the financial reform measures proposed, such as taxing transactions that take place on regulated exchanges, would actually penalize the markets that, during the economic downtown, functioned the way they were supposed to.

“It’s kind of making LaSalle Street pay for Wall Street’s bailout,” he said.

Yet regardless of whether financial reforms are perceived as punitive, Kathleen Hagerty, associate dean and finance professor at Northwestern University’s Kellogg School of Management, pointed to the Chicago Mercantile Exchange as a primary example of how the local market would benefit from increased trading.

“The people they’re really railing against are not the exchanges,” she said earlier Wednesday.

Hagerty acknowledged that although non-exchange financial institutions in Chicago would probably be unhappy about regulations such as limiting derivatives, in the long term, the increased transparency will be good for everyone.

“The financial industry did a lot of things that contributed very strongly to the crisis, so I think it works politically to be critical of them,” she said. “For a lot of the regulation, the devil is in the details and he’s certainly not going to speak to the details in the talk,” Hagerty predicted before Obama’s speech Wednesday.

It’s those details that have kept reform attempts in the Senate stalled so far, say the president’s Republican opponents. Senate Republicans voted to prevent the Democrats’ Wall Street reform bill from going to the Senate floor for discussion three times before reaching an agreement to allow it to go forward late Wednesday.

“I’m pleased that after a few days of delay, it appears that an agreement may be in hand to allow this debate to move forward on the Senate floor on this critical issue,” Obama said.

He framed the debate as a simple choice between permitting the same path of irresponsibility that led to the crisis and scoring another victory for Americans, in remarks that had started with a lengthy recitation of his presidential accomplishments to date.

“That’s what we’re fighting for,” Obama said. “The American dream, right here in Quincy, right here in Illinois and all across the country.”