United States President Barack Obama last week signed into law the most sweeping set of Wall Street reforms since the Great Depression.

The reforms, which affect nearly all segments of the financial services industry, are largely designed to stop the outsourcing of risk by companies and once again hold them accountable for their decisions.

"There will be no more tax-funded bailouts," Obama said in summing up the new laws.

Part of the reforms involves tightening the rules for the use of derivatives, which has been largely blamed for the collapse of financial behemoths such as American International Group and Lehman Brothers.

The measure will move the majority of derivatives to clearing houses and exchanges. The idea is that this process will give a better estimation of the value of transactions.

It will also introduce a middleman between trades that should make financial firms less interconnected and prevent the domino effect of financial firm collapses such as occurred in 2008.

Problem solved? Not so, according to former Lehman Brothers vice president Lawrence McDonald.

McDonald, who is the author of  'A Colossal Failure of Common Sense - The Inside Story of the Collapse of Lehman Brothers', said little would change in the next two years.

"A lot of my old colleagues on Wall Street feel they have just dodged a bullet, because they have two or five years to work a lot of this out," he said.

"All the major foundations of this bill are watered down to the point that there are 18 months to five years studies before a lot of the enforcement action comes in."

Although the US banking system had improved in health over the past two years due to a substantial amount of deleveraging, in the short term derivatives continue to sit on balance sheets, he said.

"Charlie Munger, Warren Buffett's business partner, invited me to Omaha to the annual meeting [of Berkshire Hathaway] and the biggest thing they were concerned about is these insured deposits in banks that are sitting right next to derivatives," he said. 

"A Citigroup or a JP Morgan might have US$2 trillion in deposits and US$8 trillion in derivatives - that really annoyed Munger and Buffett.

"These banks are sitting on a lot of innocent people's money, but they also have a lot of derivatives right next to them."

McDonald is a former Lehman Brothers fixed interest trader who worked on the same floor as where the company's synthetic derivative products were produced.

He watched with horror how this conveyor belt of product creation brought down the Wall Street giant.

"They were bringing out synthetic CDOs (collateralised debt obligations), CDO squared, CPDOs (constant proportion debt obligations), all these products and it just seemed that in 2007 every other week there was a new product line generated. It just seemed to me that there wasn't a lot thought going into the collateral damage and side effects of these products," he said.

But the products had the blessing of long-time Lehman chief executive Richard Fuld and there was little room for criticism, he said.

"There was a lot of arrogant jargon and intimidation. They tried to intimidate people to just go with the flow; like you were a complete moron if you questioned the validity of these products," he said.

McDonald, who lost his job at Lehman during the mass lay-offs in early 2008, said it was heart-breaking to see how the derivatives business brought down the rest of the company.

"It was just sad watching this wonderful, beautiful ship go right into that iceberg at 165 miles an hour," he said.

Although in the short term not much was going to change, Wall Street would look very different in five years, he said.

"I think the lesson learned is that you are going to see a much more robust origination process, at least in the product line," he said.

"In 2006 and 2007, you could originate a CDO or CLO (collateralised loan obligation) and you didn't really have to hold up reserves against that origination.

"I think that is going to change. I think they are going to force people to have skin in the game."

The restrictions on derivative usage form just one aspect of a number of tighter rules for US financial institutions.

Under the reforms, banks also have to adopt much stricter capital and liquidity requirements, and the US government is keen for other countries to follow its initiatives to create a more stable global system.

In Australia, some banks have argued they do not need stricter capital rules because of the robustness of the Australian regulatory regime.

But Magellan Financial Group chief executive Hamish Douglass said that argument presented too rosy a picture of the chain of events during late 2008.

"The Australian banks argue that because they were resilient throughout the financial crisis we are different and that we don't need to have all these rules," Douglass said.

"I would say that is a load of baloney, because had the Australian government not stepped in and guaranteed deposits and guaranteed funding, I believe every Australian bank would have collapsed.

"The only reason the Australian banking system didn't collapse was the strength of the Commonwealth government's balance sheet."

Douglass argued that the Australian banks were just as vulnerable to systemic risks in the financial system as any other bank in the world, and he hoped they would be forced to adopt tighter capital requirements and reduce their dependency on the international funding markets.

"Of course, the Australian banks don't really like this shifting of the rules because it is really going to affect their profitability, but I actually think that the world will be better off when they come down with proper rules," he said.