How’s That War on Wall Street Going?

“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.

Photo: Dreamstime.com

Obama: We Want Our Money Back. And We’re Going To Get It.

When the 2008 bank bailouts took place, led by Henry Paulson, Ben Bernanke, and Timothy Geithner, the nine largest banks were forced to take “bailout” money even though some did not believe they needed it and did not want it. [1] Other banks have also received government assistance. Various banks have paid back or are in the process of paying back these TARP loans. The government has sometimes expressed a reluctance to be paid back, but has accepted repayments. Now, they’re demanding repayments and more. On Thursday, January 14, President Obama announced plans for new fees to be paid by large banks.

“‘We want our money back. And we're going to get it,’ Obama stressed. ‘And that's why I'm proposing a financial crisis responsibility fee to be imposed on major financial firms until the American people are fully compensated for the extraordinary assistance they provided to Wall Street.’” [2]

The Obama Administration has worked out a scheme of large fees that are supposed to recover “bailout” funds. Striking a populist tone, Obama seeks to demonize the banks and their “obscene” bonuses, when in fact, government, including Obama, bear the main responsibility for the state of affairs that brought about the bank “bailouts” to begin with. It is remarkable hypocrisy, and not good economics.

Economics is not the Administration’s strong point, except in their efforts to damage our economy. The “bailouts” were designed to assist favored big banks (Goldman-Sachs, for example) while some financial institutions, notably Lehman Brothers, were left to die. Foreign banks got a good bit of the money also. The painting of “fat cat” Wall Street executives as great villains serves (at least) the following purposes for the Obama Administration:

1. To deflect blame for the bad economy and financial crisis from themselves

2. To present themselves as protectors of the people from the evil banks
As a Reuters article points out, “Public rage at bankers, whom Mr. Obama chided in December for their ‘fat cat bonuses,’ has taken on a deeper political dimension as Democrats who control Congress weigh sweeping financial regulatory reforms in the face of stiff industry opposition.” [3] The strategy is to make bankers look like the bad guys the Administration is trying to protect us from. It seems to be working to some degree.

Politico notes the following:
“Criticizing Republicans, he [Obama] said financial industry lobbyists are ‘locking arms with the opposition party’ to stand in the way of reform. And he called on banks not to fight the tax with a ‘phalanx of lobbyists’ and lawyers, urging them not to ‘stick it’ to their customers and shareholders by passing on the fee to them.

“‘I suggest you might want to consider simply meeting your responsibility,” he said.” [4]

But the Democrats’ idea of reform is to regulate to the point of micro-managing financial institutions. The banks’ “responsibility” is to obey the law and maximize stockholder value, not to make sure the government likes everything they are doing.

3. To portray the financial crisis as a failure of capitalism, when in fact it was essentially a failure of government.
The fat-cat capitalists are pointed to as the problem, and now they’ve started making money again. To exploit class envy as much as possible, Obama reminds us that the American people are suffering from high unemployment (which Obama isn’t helping) while the bankers are getting big bonuses. The Administration is trying to build on the false notion that “capitalism failed,” so socialist policies are needed.

4. To distract some attention from the dismally corrupt efforts to pass the awful “healthcare reform” which most Americans strongly, and rightly, oppose.

“‘My determination to achieve this goal [recovering ‘every single dime’ of the TARP advances] is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people,’ Obama told reporters at a White House event.” [5]

How dare they make profits? How dare they pay bonuses? How dare they run a successful business in one of the world’s most thoroughly government-regulated environments? The fiends! Of course, substantial taxes, federal, state, and local, are paid on these profits and bonuses. I have written in favor of the government recovering as much of the TARP money as possible, as quickly as possible, and I still think that. But this is not the way. Consider:

(1) The fees of 0.15 percent of balance sheet assets on companies with over $50 billion of assets will also fall on companies that have already repaid their TARP advances or never received TARP money at all. [6] So this, contrary to Obama’s statements, isn’t just a plan to recover TARP, it’s a plan for punishing success. Presumably, the assistance to banks was supposed to allow them to earn a profit. But liberals don’t like private-sector corporate profits.

Apparently, the fees will continue on all affected banks until an amount equal to all the TARP advances is collected (with interest?). So it isn’t a matter of each bank simply repaying what it was advanced. It is not clear (to me, at least) how this affects government’s equity stakes in the affected companies. And, of course, “temporary” taxes and fees often somehow become permanent.

(2) The fees are supposed to recover $90 billion over ten years, but the projected TARP losses are $117 billion.

(3) The fees are, in effect, a tax, the cost of which must, as all costs must, ultimately be recovered from the banks’ customers. So these fees will have ripple effects through the economy, and various unintended consequences.

“AIG [the large insurer taken over by the government] will be subject to the fee, but mortgage lenders Fannie Mae and Freddie Mac, which are under government conservatorship, will be excluded, as will still-ailing U.S. automakers that got bailout money.” [7] Of course, being government-sponsored enterprises (GSE’s), Fannie and Freddie haven’t been held to the high standards expected of private companies. This just points out the hypocrisy in Obama’s chiding of big banks.

Carl Horowitz at National Legal and Policy Center writes:
“The troubled secondary mortgage lending giants [Fannie and Freddie], already having received more than $110 billion in federal subsidies since the fall of 2008, are set for another major feed at the public trough. On December 24, the U.S. Treasury Department, facing a December 31 deadline, approved a no-limit hike in the publicly-traded companies' combined $400 billion credit line. Were that not enough, regulators approved an annual compensation package of up to $6 million for each chief executive officer. Welcome to pay for performance, Obama-style - not that the Bush version was a bargain.” [8]

A congressman from Texas makes a good point in his criticism of the bank fees:
“This is the latest proposal in the Obama administration’s failed attempt to borrow, spend and tax their way into economic prosperity,” Rep. Jeb Hensarling (R-Texas) said earlier on Wednesday. “To think that banks will loan more money if you tax them is beyond economic ignorance.” [9]

The TARP bailouts were an ill-conceived and ill-advised idea to start with. The bailouts should never have been done. But since they were, repayment terms should have been agreed upon at the time the advances were made, and firms that didn’t want the money should not have received it.

And now, Obama should be seeking recovery only from the companies that received funds and still haven’t paid them back. At this point, Obama Administration people should be quietly working out repayment schedules with the banks that still owe money. Mostly, they’re anxious to get it repaid and get government out of their hair about it. But, apparently, we can’t expect this government to think like that. They want to score political points by pretending they’re looking out for us by punishing all the banks that are paying large bonuses.

[1] Matt Cover, “Inspector General: Treasury Secretary Forced Banks to Surrender Ownership Interest to Government,” 10/05/09, CNS News.com, at http://www.cnsnews.com/news/article/55017

[2] Tony Romm and Silla Brush, “Obama determined to recover ‘every dime’ the public is owed from bailout,” 01/14/2010, The Hill.com, at http://thehill.com/homenews/administration/75853-obama-to-raise-90b-with-new-financial-fee

[3] Alister Bull and Caren Bohan, Reuters, “‘We want our money back,’ Obama tells bankers,” 01/14/2010 The Financial Post, at http://www.financialpost.com/story.html?id=2440608#ixzz0ceS0D9pJ

[4] Politico 44 Whiteboard, “Taxing Banks” at http://www.politico.com/politico44/perm/0110/obama_on_bank_fee_bcfec2c8-98a1-4a6d-ac82-cc55df6510b2.html

[5] Caren Bohan and Alister Bull, “Obama proposes bank fee, slams Wall Street,” Reuters.com at http://www.reuters.com/article/idUSTRE60D1PA20100114 . This item and [3] appear to be different editions of the same article.

[6] Ibid. Emphasis added.

[7] Bull and Bohan, see [3].

[8] Carl Horowitz, “Fannie Mae/Freddie Mac Bailed Out Again; CEO Pay Set for Huge Boost,” 01/06/2010, National Legal and Policy Center, at http://www.nlpc.org/stories/2010/01/06/fannie-maefreddie-mac-bailout-ceo-pay-set-huge-boost

[9] Romm and Brush, see [2].

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