Populist Outrage Rarely Drives Real Reform

President Barack Obama has spent a year in office and set forth an ambitious agenda of populist reform.

After receiving more than $17 trillion in aid, the nation’s financial industry has become the most obvious target and rightly deserves heightened scrutiny.

The push to close regulatory loopholes that are wide enough to drive a Mack truck through is gaining momentum in Washington. In recent months the House Financial Services Committee has discussed several consumer-oriented proposals that range from improving access to easy-to-understand vanilla loans to curbing sudden rate resets on credit card balances.

And in mid-October, the committee tackled an array of bills aiming to bring the $450 trillion derivatives market under the purview of federal regulators and impose new curbs on hedge funds, insurers and brokerages.

But many of the proposals were essentially nonstarters; industry lobbyists were able to kill the bills outright or ensure that equally enormous loopholes were built in.

Pitched battles are being waged over how much power a new Consumer Financial Protection

Agency would wield and what types of institutions and financial products would fall within the scope of its authority. It already appears as though the agency will have few, if any, teeth to enforce whatever standards it sets.

Many banks have already circumvented the credit card reforms passed early this year, preemptively raising interest rates on millions of borrowers and closing the accounts of others.

And the new derivatives legislation has already come under fire for failing to restrict their use to hedging activities.

Efforts to introduce a reform package dealing with the heath care industry have faced similar roadblocks, and environmental legislation has fared little better.

Reform driven by populism rarely hits its mark, erring to one extreme or the other. But misguided reform also creates lucrative opportunities for investors.

Health care investors should view the sector through an objective lens, focusing on names that are unlikely to bust because of drastic shifts in policy. In fact, as the worries over reform continue to weigh on the sector, many of the major pharmaceutical outfits such as Wyeth (NYSE: WYE) and Bristol Myers Squibb (NYSE: BMY) are trading at historically low valuations.

Many financials are in a similar boat, generating gains even as investors’ worries have kept valuations down. The same goes for select smaller banks and even some real estate investment trusts, both of which can offer above average yields.

Although populism and regulatory reform may create an insurmountable wall of worry, remaining objective will allow individual investors to take advantage of the opportunities these hazards create.

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