NEW YORK ( TheStreet) -- It's the first day of the third quarter, and there's a lot less optimism floating around than there was three months ago. The housing market is looking weaker, consumer confidence (and implicitly, spending) is tumbling back down a cliff, the stock and bond markets are back to being volatile, and Congress is (
once again ) fueling the uncertainty with its "financial reform is passed - wait, no it isn't" wavering. Looking ahead to quarterly reports for the financials, the picture is pretty bleak. Since the start of June, at least 16 analyst shops have cut earnings and revenue estimates, price targets, recommendations or some combination of them for big banks like Bank of America ( BAC), JPMorgan Chase ( JPM), Wells Fargo ( WFC), Citigroup ( C), Goldman Sachs ( GS) and Morgan Stanley ( MS), according to Thomson Reuters data. And yet, the Street is still recommending that investors buy...well, the Street. Each of the Big Six banks have buy or strong buy ratings. Wall Street's price targets are 50% higher, on average, than the banks' closing share prices on June 30. So, just to get this straight: The banks are facing big economic headwinds, second-quarter earnings reports are likely to disappoint and the financial reform bill - while not as harsh as it might've been - will still force them to reduce their most profitable operations , get rid of certain assets , raise capital and possibly dilute shareholders even more. I'm not a stock analyst, but I'd be skeptical about predictions of a 50% surge in big banks' share prices any time soon. Buybacks Ahoy? Despite the sharp sell-off in bank stocks and the risk of additional capital-raising there may be one firm that stands out from its diluted brethren: Goldman Sachs. Goldman began share buybacks in the first quarter to much fanfare and had the opportunity to buy much more at a bargain in recent weeks. Its stock is down more than 40% from a recent closing high near $185 in mid-April. Despite the plethora of other issues it faces, Goldman's balance sheet is also stuffed with capital. For instance, its Tier 1 risk-based common capital was 12.9% as of March 31, according to SNL Financial. That's about 4 points higher than any of its big-bank peers. Furthermore, it has very little of the exposure to bad loans in the mortgage or commercial real-estate markets that other banks do.
Whether Goldman continues those buybacks -- as management promised to do -- or simply relies on that horde of cash to respond to changes in financial regulatory law, it's a win for shareholders on a relative basis. Derivatives Estimates, Meet Grain of Salt There's no doubt that the initial proposal by Sen. Blanche Lincoln (D., Ark.) with regard to derivatives would have had a huge impact on the
financial sector , corporate counterparties and consumers down the line . But the concessions that Lincoln eventually made -- thanks to small-bank advocates, regulatory opposition, lawmaker opposition, Obama opposition and perhaps some semblance of common sense -- made the amendment a lot less drastic and a lot more sensible. It will allow banks to keep trading plain-vanilla securities that they use to hedge risk in-house. It will force more speculative trades into new entities that will have to be recapitalized without taxpayer support. And the broader Dodd-Frank reform bill will force all of the more common derivatives trades onto exchanges to increase transparency and ensure that banks and end-users hold enough capital to protect against bets gone bad. Yet, still, the industry is coming out with dire predictions about the impact of the reform measures. Earlier this week, the International Swaps and Derivatives Association estimated the changes will result in $1 trillion in costs to U.S. companies who use swaps to protect against risk, too. Let's take a look at that headline number , shall we? The $1 trillion figure represents what ISDA thinks end-users would have to set aside in collateral if the credit markets return to the tundra-zone of 2008. Right now, ISDA actually thinks end-users will need to set aside $370 billion in collateral to cover their over-the-counter trades. The trade group also lists 500 end-users at year-end 2009 in a spreadsheet -- so, on average, the collateral per-user would be $740 million. Logically, larger firms with more risk exposure would need to set aside more and smaller so-called "Main Street" firms -- although I don't think the corner deli is involved in the derivatives market -- with less exposure would have to set aside less.
ISDA's most recent survey of end-users also shows that there's less risk and more participants than there were in the middle of 2008, when the credit markets were in a tizzy. Furthermore, the finreg bill will probably not be implemented for at least a few years, and regulators will have authority to use discretion in how laws are applied. ISDA is representing its clients, as it should. But for readers, analysts and "Main Street," the bottom line is this: When the industry profiting from derivatives cries from the top of the mountain about the costs and effects of reining in the derivatives market, and the numbers seem a little bit huge, take those declarations with a grain of salt. -- Written by Lauren Tara LaCapra in New York.