This one is going to leave a mark — a giant void, in fact, that used to be filled with profits that drove New York City’s economy and helped fuel the last bull market that created millions of jobs.
President Obama’s latest attack on Wall Street — his third in a week — aimed at hemming in risk by keeping banks from making corporate bets with depositor cash, wiped out more than $66 billion in value from the country’s eight largest banks in two days.
Investors raced for the exits last week after Obama unveiled his surprise new banking regulatory framework — without providing much insight into exactly how it would shape the future of financial institutions.
One thing is certain — if Obama succeeds, the profits of the banks will be crimped.
At the same time, critics charge, the moves will do little to prevent the exact thing the White House said it wanted to insure –keep the US economy from another meltdown.
The Obama plan, while apparently part of his populist screed aimed as shoring up his political base, clearly ignores the off-balance-sheet moves, namely derivatives, placed by embattled firms like AIG, Fannie Mae and Freddie Mac which clearly brought the economy to its knees.
But while those firms, along with GM and Chrysler, continue to survive only because of taxpayers’ handouts that have yet to be repaid, they have not been singled out for higher taxes, tighter regulation or scorn.
The White House announced that financial firms could no longer own hedge funds or private-equity funds, nor can they partake in proprietary, or prop, trading.
“Looking at prop trading as something that brought us to the brink in 2008 might be right directionally, but it seems pretty plainly wrongheaded to me if it is the specific focus of these proposals,” said Jamie Selway, managing director at White Cap Trading
Selway said the real problem is the government’s “too big to fail” policies that have propped up failing banks. “This needs to be fixed,” he said. “It landed us in the soup because of the bailouts. We cannot continue to have a level of risk taking that is supported by a government safety net.”
This week’s actions, combined with the bankers’ tax provision offered up two weeks ago show the White House does not have a firm grasp on what created this two year Great Recession.
Derivatives!
AIG, Fannie and Freddie did not put the global economy on life support by making bad investments in hedge funds. Bear Stearns, Lehman Bros. and other financial firms had huge off-balance-sheet investments in over-the-counter derivative bets through collateralized debt obligations and other toxic paper, which began exploding in spring 2008 after Bear Stearns imploded.
AIG’s $183-billion Uncle Sam bailout, along with the Treasury’s $100+-billion propping up of Fannie and Freddie were not the result of owning failed private-equity funds.
And yet the Obama administration fails to address the 800-pound gorilla in the room, despite hearing testimony from several of the CEOs of the Wall Street banks this month before the Financial Crisis Inquiry Commission.
As Goldman Sachs’ chief Lloyd Blankfein testified to commission member Brooksley Born on the role of derivatives, “Aspects of the over-the-counter derivative market were a very, very big concern and a big worry, so much so that a lot of institutions — all of the institutions here, I believe — were working very, very hard to make sure that things would settle and that things would clear.”
Born — the former US Commodities Futures Trading Commission chair during the Clinton administration — tried during her tenure to bring transparency to the OTC derivative market only to be thwarted by then-Fed chief Alan Greenspan, then-Treasury boss Bob Rubin, who single-handedly dismantled Glass-Steagall and Larry Summers who is now White House senior economic advisor.
The back-door bailout of the banks by AIG was not over its prop-desk trading losses, but the toxic credit derivatives it wrote as insurance for subprime loans.
Meanwhile, stocks have sold off over 4 percent since the administration’s announcement. “It is clear to us that the market is not overreacting,” said Meredith Whitney, founder of Meredith Whitney Advisory Group. “The possibility of this proposal going the distance is high.”
2-day losses
Goldman $7B
Citi $5.9B
Morgan Stanley $3.85B
BofA $13.8B
JPM $16.7B
Wells $2.6B
Barclay’s $7.6B
HSBC $8.7B
Total: $66.3B
With John Aidan Byrne