“Barack Obama declared war on Wall Street,” proclaimed a story appearing in Saturday’s January 23, 2010 edition of the London Times. The Times reports that in his “pugnacious lunchtime” speech on Friday, Obama introduced a “sweeping series of measures aimed at checking the behavior of banks” which will be the “biggest regulatory crackdown on the banks since the 1930’s.” The markets responded with the largest three-day decline since the market bottomed in March of 2009.
The notable aspect of the President’s new offensive to limit the profit and pay of financial institutions and their employees is not its content but its timing and intent. Obama’s attack came just two days after the Massachusetts Senatorial election. The Times says Obama’s hurried offensive was aimed to draw attention away “from the loss of the late Teddy Kennedy’s Senate seat — a defeat that threw his domestic agenda into turmoil and sent fear through Democrats. Mr. Obama hopes that the move will reset his flagging presidency.”
It’s sad that President Obama is more concerned with strengthening his political future at the expense of the struggling economy. The Times continues that the proposed banking restrictions are just the latest round of populist measures aimed at the financial sector in recent months, such as levying a tax on banks to recoup the cost of government bail-outs and setting up a consumer protection agency. Ironically, all of Obama’s ideas are facing resistance from the Democrat super majority controlling congress.
The populist notion of punishing the rich, whom Obama calls the “fat cats” on Wall Street, is an age-old theme that plays well with “the poor,” which today includes the 70% of Americans who have largely chosen to live paycheck to paycheck. This new offensive on the rich will probably end as most do, with unintended consequences that will end up hurting the “poor” more than helping them. Let me explain.
When the economy was in a free fall, many investment firms were unable to borrow private sector capital needed to keep their doors open. The only capital available was from the Federal Government, and that was only available to highly regulated bank holding companies. Faced with the prospect of declaring bankruptcy, most investment firms converted themselves into bank holding companies, a perfectly legal move, so they could qualify for government help.
According to The Times, President Obama asserts that “when banks [holding companies] benefit from the safety net that taxpayers provide, which includes lower cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit.”
How quickly the President seems to have forgotten the catastrophic losses all these companies suffered in 2008. On the heels of the historic crash of 2008 came the historic market rise of 2009, which produced record profits offsetting only some of the losses of 2008.
Obama’s proposal covers every large bank, including those that did not receive bailout funds. His desire to limit the profits that large banks can earn leaves me perplexed. If a financial institution is not trying to make a profit to pay competitive rates on deposits, a return for its shareholders and security for its employees, what is the point?
Profits are a crucial component necessary for job creation. This fundamental economic principle seems to be lost on President Obama and much of the Congress.
The President went on to say, “We should no longer allow banks to stray too far from their central mission of serving their customers. My resolve to reform the system is only strengthened when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low and cannot refund taxpayers for the bailout. If these folks want a fight, it’s a fight I’m ready to have. Never again will the American taxpayer be held hostage by a bank that is too big to fail.”
So what is wrong with wanting to reform the system and force banks to limit their risks, lower their profits, and restrict their wages? Absolutely nothing if you are an avid socialist. Obama’s plan will certainly accomplish his goal of reducing bank profits. Lower profits, however, won’t help the banks pay off their bailout loans or help attract and retain the highly skilled labor needed to make profits in the first place. The Times says the proposal will also increase costs to bank customers, make it harder for small businesses to get loans, and result in further layoffs increasing unemployment.
Obama’s “War On Wall Street” appears destined to catch the sputtering recovery in a round of friendly fire, resulting in intensifying the economic suffering of Americans, increasing the possibility that the loss of Teddy Kennedy’s Senate seat to the Republicans was just the beginning of an angry public’s counter offensive.
Planning Strategy: It could be the President’s offensive on Wall Street will give the market an excuse to correct, which is overdue after such a phenomenal run-up. Please review my column on “Waiting for the second dip in the ‘W’”. I would not be surprised to see the U.S. Markets up on Monday and possibly finish the month on a positive note. Who knows? No one!
What does this mean the average KFG client should “do?” Absolutely nothing. While you probably have grown tired of hearing this (I know I’ve grown tired writing it), trying to get out of stocks during a falling market and then buy back in when they begin to rise is great in theory and a pipe dream in reality. Timing markets will typically cost you money, not make you money.
If you are not a KFG client, be sure your portfolio is diversified among eight to ten asset classes and limit your exposure to US assets to around 50% of your portfolio.