Eoin Treacy's view Populist measures which seek to assuage widespread public anger and that attack a powerful lobby group will invariably have difficulty being passed in their original form. The Healthcare Bill continues to encounter resistance and there is a high likelihood that the final shape of any reform of the financial sector will be different from what is currently being proposed and will face considerable opposition regardless.

The Long Term Capital Management bust taught a certain brand of cynical banker an important lesson; that if you bet big enough, you will look like a hero as long as your are right and will be bailed out if you are wrong because your actions threaten the fabric of the system. Fast forward and the same has been true with the bailouts of Fannie, Freddie, AIG and a number of banks.

Reform is necessary but needs to be broad enough to tackle some of the root causes of the crisis. Nothing has yet been done to tackle the culpability of the ratings agencies in this mess but the chances are that this will occur in due course. Protecting the public from the need to bailout financial institutions is a complicated affair and can only realistically be achieved by reducing the size of trades and/or the leverage employed. Putting a division between commercial banking operations and the proprietary trading operations will help to protect depositors from trading mishaps but does not cap the size or scale of trading operations so it does not succeed in limiting the potential for the government to have to step in and bailout the financial sector in a future crisis.

The US government has been trying unsuccessfully to regulate the ability of senior executives to pay themselves for decades. (Also see Comment of the Day on October 29th 2009). Every time a new initiative is introduced a loophole is found so executives can work around it. Regulation of the financial sector will only be deemed successful if the limits introduced prohibit institutions from continuing to make bets they cannot cover without recourse to the taxpayer.

The last decade has been characterized by an explosion in risk talking on Wall Street and some notable mergers between commercial banks and investment banks. JP Morgan with Chase Manhattan, Bank of America with Merrill Lynch and Citigroup through various acquisitions have all come to the same situation where major investment banking operations are supported by deposits more than the bank's own capital. Europe is also replete with examples of institutions that have large retail, commercial and investment banking arms. Deutsche Bank, BNP Paribas, RBS and Barclays are just a few examples of such companies.

Morgan Stanley and Goldman Sachs, of the remaining US investment banks, demurred from the commercial banking sector until recently. Liabilities contingent on deposits from retail and commercial customers make up a comparatively small proportion of their businesses. Let's not forget that the only reason these two companies donned the mantle of commercial banks was so they could access cheap credit at the discount window. Reverting back to their pre-crisis structure would therefore be a considerably less painful step than for companies where retail and commercial banking make up a larger proportion of the business. However, if they are permitted to make such a move, there should be cast iron guarantee that they will never tap the taxpayer for funds again. Whether this is realistic or not remains an open question.

Banks such as HSBC or Wells Fargo, which have concentrated more on commercial and retail banking rather than investment banking should also have less of a problem divesting themselves of whatever proprietary arms they have without undue trouble; should the need arise.

Hedge funds remain largely unregulated and a good many are domiciled in offshore centres. They will not be affected by the proposed reforms in their current wording. Some of the larger hedge funds now approximate the partnership model abandoned by the investment banks, where the managers are risking their own money and that of their investors. Depending on the extent of global financial reform some hedge funds could benefit by concentrating on their ability to act as pools of liquidity for private equity and proprietary trading.

The S&P 500 Banks Index has been less affected by yesterday's announcement that the S&P500 Diversified Financials Index which is an indication of which companies the proposed reforms are most likely to affect. We have not yet seen a similar initiative for the European or UK financial sectors and it is unclear to what extent they will be affected by US regulation. However the Dow Jones Euro Stoxx Banks Index has been leading the global sector lower. It broke downwards from the 6-month range yesterday and needs to sustain a rally back above 220 to question scope for a further test of underlying trading. Interestingly, while global stock markets continue to move in line with the Wall Street Leash effect, respective banking sectors in Asia and Latin America have so far be comparatively unaffected by these proposed reforms.