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Time to buy big banks? Not so fast.

By Paul R. La Monica, editor at large

NEW YORK (CNNMoney.com) -- Congress and the White House finally got what they've wanted since the financial collapse of September 2008: tough Wall Street reform.

But how "tough" is the financial reform bill? If the initial reaction from investors is any indication, it's not so tough at all.


Shares of the banking sector's six colossal heavyweights -- Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), J.P. Morgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) -- each rose between 1.5% and 2% early Friday before cooling off just a bit.

Take that, big bad banks!

Investors had been fearing regulatory reform for months. But even with the inclusion of the so-called Volcker rule, which restricts banks from some risky behavior, and plans to rein in the trading of derivatives, experts said the final bill doesn't have nearly as much teeth as it could have.

"The banks dodged all the big bullets. The bill really could have had a damaging impact on the financial sector's profits," said Anthony Polini, a bank analyst with Raymond James. "You're seeing words like 'watered-down' to describe it and that's good for banks."

Polini estimated that net income for the nation's top banks - which includes the six mentioned previously as well as regional giant U.S. Bancorp (USB, Fortune 500) - will only be about 4% lower in 2011 because of financial reform.

His estimate also includes the impact from the new law on credit cards that went into effect earlier this year.

If that's the case, big banks are going to keep minting money. So it's no wonder that bank stocks are rallying. It's a big sigh of relief now that the worst-case scenario hasn't been realized.

But is that really true? Some think it's premature for banks and bank investors to celebrate.

Scott Armiger, a portfolio manager with Christiana Bank & Trust Company in Greenville, Del., said that it's important to remember that there's a difference between what the bill looks like now and how it will actually be implemented and enforced once it becomes law.

Armiger said he's avoiding big banks because he's not yet convinced that the economy and housing market are improving all that dramatically. And he said that the reform bill doesn't do enough to change the dynamics of housing finance.

He said that cracking down a bit on derivatives is a start but that more needed to be done.

"I don't know how you can call it reform when you don't address Fannie Mae and Freddie Mac, the genesis of the real estate problem," he said.

Daniel Alpert, managing director of Westwood Capital, an investment bank in New York, agreed that the bill is not a cure for the financial sector's problems. He said that even once a bill is passed and signed by President Obama, there will still be a lot of uncertainty for banks going forward.

Alpert said the biggest question mark for banks was not addressed, namely how much capital they really should be forced to have to make sure that there isn't a repeat of 2008. Congress is leaving that for the Federal Reserve, FDIC and other regulators to decide.

"The big issue is capital requirements. Until that's resolved, we won't know the true impact of reform," Alpert said.

"For something that emerged from this Congress, the bill is a great achievement," he added sarcastically. "But the truth is that it was only accomplished by kicking the can to regulators."

So don't be surprised if the knee-jerk bounce in bank stocks quickly fades once investors realize that not much has actually changed just yet.

Reader comment of the week. What a long, wild week. It seems like ages ago that China made its move to let the yuan float more freely. That's likely to be discussed often this weekend at the G-20 confab in Toronto. So is the topic of continued deficit spending by the U.S.

This comment tied to Monday's yuan column addresses both of those issues.

"Yuan has nothing to do with our economic problems. Making Chinese currency more valuable will mean we will have to pay more at WalMart. Paying more for what we consume is not a fix. We will still do deficit spending, but we will be able to afford less. The problem is spending beyond our means. Debt is the problem and we have more of it now," wrote Albert Kyle.

- The opinions expressed in this commentary are solely those of Paul R. La Monica.  To top of page

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