“The government’s key policy lever should be to make sure that institutions hold enough capital to reflect the risks that they run and the threats that they pose to the rest of the financial system.” – Financial Times editorial [1]
There is broad consensus that regulatory measures should be taken in regard to Wall Street firms in order to lessen the likelihood of a financial meltdown such as we saw in 2008. There are several options ranging from tweaking to government takeover. President Barack Obama has reportedly declared war on Wall Street, and it is doubtful that this approach will end up helping the situation.
Treasury Secretary Timothy Geithner is not the front man for Mr. Obama on his reform effort. Instead, former Federal Reserve Board Chairman Paul Volcker is the spokesman. This leads us to wonder what Geithner’s role is now. Is Volcker the “reform czar”? Obama is championing the Volcker plan that would stop big banks from their proprietary trading, and set up measures to sell or merge “failing” financial institutions.
While these measures seem doubtful of approval, the stated goals are worthwhile: no more bailouts and no more institutions “too big to fail.” This should be the government’s and the Fed’s position immediately. The bailouts of 2008 should never have happened.
Christopher Dodd, Senate Banking Committee chairman, had said the Volcker plan is too ambitious. But what would it be replaced by? Something not so strong, or nothing at all?
Atlantic has an online article by Daniel Indiviglio titled “Dodd’s Resistance To Volcker Plan Should Signal Its Death.” The article states that while Dodd is not opposed to new regulations in theory, he thinks Obama’s plan is too far-reaching and seems to step on the toes of his committee. [2]
While Geithner has reportedly been working with Wall Street executives during and following the bailouts, Obama seems to be undermining his efforts through his populist rhetoric painting Wall Street as the enemy. Obama does his best to play up the executive bonuses as “shameful” as Americans are struggling with unemployment, etc. Several banks were forced to take bailout funds in 2008 (in exchange for government equity positions), fearing this same type of government opposition, and those who wanted the bailouts should have been aware something like this was coming. Government funds equals government control, roughly in proportion to funds provided.
Now that much of the bailout money has been paid back, Obama is still not satisfied and wants to further press control. Regulation is one thing, but putting Wall Street on his enemies list is another. It’s there, along with Fox News and Las Vegas.
“‘We have to get this done,’ Obama said at the White House. ‘If these folks want a fight, it's a fight I'm ready to have.’” [3]
Banks Don’t Want a Fight
According to Richard Schmidt’s article of 01/27/2010, “Industry officials said they were stunned. ‘We did not know it was coming, that’s for sure,” said Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents large banks and insurance companies …’
“We don’t want to fight the administration,” said Rob Nichols, whose trade group, the Financial Services Forum, represents the chief executive officers of the largest financial companies. “We just want to sit at the table and have a productive conversation about the kinds of reforms needed to address the real causes of the recent crisis.” [4]
But after Obama’s disappointing loss of a Democratic Senate seat for Massachusetts, he’s putting increased emphasis on some of his populist villains, whom he has characterized as “fat cats.” Not exactly presidential terminology. But politics comes first.
The president has announced plans to recover the TARP bailout money through a new fee on large banks, even including those who have paid back TARP money or never received any. He wants to impose strong new regulations on them, i.e., the Volcker plan. And he wants to severely restrict executive compensation. There is strong opposition to all these plans.
Wall Street and NY Officials Will Fight Back
According to an AP article appearing at CNS News, “Financial industry officials are especially frustrated by a proposed change they see as political and punitive without doing anything to prevent future crises. They say the changes would not have prevented the largest bank failures of the crisis.” [5]
Some New York Democratic politicians are going to oppose Obama on this, recognizing that a large amount of tax revenue (state and city) normally comes from the large bonuses paid to Wall Street executives. Mayor Michael Bloomberg recognizes this, and previously voiced concerns over the state’s proposed “millionaires’ tax,” because much of New York City’s budget is provided by taxes on wealthy people, and increasing them more will motivate many to move out, potentially causing a (more) serious financial crisis for the city.
Henry Blodgett of Business Insider reports as follows: “Mayor Bloomberg said the banks and Wall Street are part of the bedrock of the city's economy, and efforts to slash their business just means less tax revenue for the city, which brings up the dreaded ‘L’ word.
“‘If that's the case then we'll have to lay off people because it will really hurt our industry,’ Bloomberg said…”
“‘Maybe we should hold back their [Congress’s] salaries for a decade or so and see whether the laws they pass work out,’ Bloomberg said.” [6]
To which Politico adds:
“‘They may be an enormous amount of money for one person,’ Bloomberg said last year when Obama proposed capping executive pay, ‘but they are how our people in the city in all industries get paid.’”
New York Governor David Paterson (D) objects to Obama’s plans to restrict Wall Street. “‘In New York, Wall Street is Main Street,’ Paterson told a receptive audience at the Museum of American Finance in December.” He is joined in his objections by Senate candidate Harold Ford, Jr., and Congressional candidate Reshma Saujani, both Democrats. [7]
Wall Street executives are reluctant to complain too much, knowing that their large bonuses don’t attract any sympathy from the public, but they are attempting to defend their interests through lobbying, possible legal actions, and even some public relations efforts. The following video is an example:
Conclusion:
No one appears to be claiming that banks’ proprietary trading caused the financial crisis. On the other hand, such trading seems to lead inevitably to conflicts of interest by undermining the interests of the banks’ customers. This does not seem to be the heart of the issue at hand, although it deserves some attention.
Banks need to be put on notice that they aren’t going to be bailed out any more, and can’t be “capitalist” with profits but “socialist” with losses. They likely have the idea, supported by government bailouts, that they are “too big to fail,” and government will bail them out again if they have big losses. Thus they have less incentive than they should to operate efficiently and safely.
There are several issues of regulatory change for the financial sector that need to be worked out. But there need not be a “war” waged for political purposes.
[1] Financial Times editorial, “A declaration of war on Wall Street,” 01/20/2010.
[2] Daniel Indiviglio, “Dodd’s Resistance To Volcker Plan Should Signal Its Death,” 02/03/2010, Atlantic.
[3] Philip Elliott and Daniel Wagner, Associated Press, “Obama Says He’s Ready for a Fight With Wall Street Firms, As He Calls for New Regulations,” 01/22/2010, CNS News.com.
[4] Robert Schmidt, Bloomberg, “Wall Street Firms Don’t Want to Wage War on Obama,” 01/27/2010, Business Week.
[5] Elliott and Wagner, see [3].
[6] Henry Blodgett, “Bloomberg Blasts Obama's War On Wall Street, Says Congress Salaries Should Be Held In Escrow For 10 Years Until We See How Their Laws Worked Out,” 01/22/2010, Business Insider.
[7] Ben Smith, “N. Y. insurgents stand up for Wall St.,” 01/30/2010, at Politico.
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