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Will Blanche Lincoln Kill Bank Stocks?

Stocks in this article: BAC JPM WFC C GS MS DB BCS UBS CS

NEW YORK ( TheStreet) -- Bank investors are freaking out, and with good reason: The companies they own have gotten hammered recently and may see up to 36% in additional downside in the weeks ahead, according to one estimate.

The bad news? Financial reform may slash revenue by at least 25%, profits by as much as 75% and force the industry to raise $200 billion in fresh capital. The good news? Things may not turn out quite as bad as those dire, doomsday predictions. The recovery will offset some of the downside, the capital burden may not be placed on shareholders, and bank stocks have already taken a big hit.

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The scary news? The outcome depends on the whims of lawmakers.

The Bill

The financial reform bill was approved by the Senate late Thursday after months of back-room negotiations and weeks of public debate. Sen. Chris Dodd (D., Conn.) first unveiled it in mid-March, but it went through several iterations since then. In the past few days alone, lawmakers added a significant amendment regarding derivatives, doubted its prospects, touted its prospects, tried to water it down, ridiculed the guy with the hose, then went back to square one.

After all that, Senate Majority Leader Harry Reid (D., Nev.) couldn't even get his colleagues to vote "yes" on holding a vote until Thursday afternoon, when 60 senators voted to move the bill forward after the cloture vote failed by a margin of 57-42 on Wednesday. The Senate bill will now be reconciled with the House version, which was approved in December.

Meanwhile, the financial industry and its major corporate clients have been sweating bricks. In their view, the derivatives measure is perhaps the single most important item in the reform package. The direct and indirect costs to the industry and the economy could be huge, depending on whether that amendment, sponsored by Sen. Blanche Lincoln (D., Ark.) is adopted, and how it is interpreted. They are so significant, in fact, that even the estimates outlined so far are ballpark guesses at best.

Blanche Lincoln
Sen. Blanche Lincoln, Democrat from Arkansas.

A line item in a report on Thursday by Rochdale Securities analyst Richard Bove outlining all the costs related to financial reform may have captured it best: "For no definable reason, I am setting aside another $20 billion in possible losses due to the unknown."

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