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Will companies dodge financial reform by moving abroad?
U.S. banks, hedge funds and other Wall Street firms are weighing whether to move more of their operations abroad now that Congress has toughened financial regulations at home.

"We've talked about it with a number of clients," says Jeff Visithpanich, principal at Wall Street compensation adviser Johnson Associates. The new bill is creating "a large administrative hassle. ... If you own a big hedge fund, there's very little reason you need to be in New York or Greenwich (Conn.)."

President Obama is expected to sign the most sweeping overhaul of the nation's financial system since the Great Depression on Wednesday. The bill is designed to prevent a repeat of the financial crisis of 2008 by cracking down on Wall Street excesses.

Once bankers have digested the 2,300-page legislation, the research firm CreditSights says, they are likely to conclude that the U.S. consumer market now offers "less attractive returns and that growth abroad is much more favorable."

In a recent report, CreditSights says Citigroup is in a good position "to deal with the brave new world" because it is already well-established in promising developing markets around the globe. It also noted that Wall Street icon JPMorgan Chase has dispatched top executives to review growth opportunities overseas.

Among the provisions that analysts say could send financial firms packing:

•The Volcker Rule, named for former Federal Reserve chief Paul Volcker, which prohibits banks from trading in financial markets for their own profit but not their clients' and limits bank investments in hedge funds and private equity funds.

•Regulation of the shadowy market in over-the-counter derivatives, where Wall Street firms earned tens of billions in trading revenue and commissions. During the debate over financial reform, Sen. Richard Shelby, R-Ala., warned, "This bill will chase risky financial trades overseas and further into the unregulated shadow banking system."

Bank analyst Richard Bove of Rochdale Securities says that U.S. corporations such as Caterpillar and Procter & Gamble, which use derivatives to protect themselves from swings in the prices of everything from currencies to commodities, could choose to do more business with foreign banks. Reason: They don't want to get entangled in the new U.S. derivatives regulation.

Under the legislation, banks also will have to set aside more capital as a cushion against loan losses, leaving less money available for loans and possibly driving corporate borrowers to foreign lenders, Bove says.

But former investment banker Douglas Elliott, a fellow in economic studies at the Brookings Institution, says U.S. financial firms may find scant sanctuary abroad from tougher regulations. Other countries, also burned by the financial crisis, are cracking down on financial risk-taking, too.

"Major overseas jurisdictions are moving in broadly the same direction," he says. "We all saw the world blow up. Many of the things that caused the world to blow up are fairly obvious."

 
 
 
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