Saturday, 23 January 2010

So about Obama and the banks...

Things are getting a bit rough for the Obama Administration. With approval ratings now below 50%, a stalled health care plan, withering environmental legislation, and the humiliating loss of "Ted Kennedy's seat" in this week's election, Obama needed something new for the public to focus on. In a shock and awe move against the banks this week Obama fell back on populist rhetoric. Let's have a look:

Obama announced that he is going to try and implement massive new regulations that would restrict what banks are able to - including huge restrictions on proprietary trading and forcing banks out of hedge funds.
President Barack Obama has proposed tough new limits on the size and activities of the country's largest banks, including restrictions on some banks' ability to trade for their own account or set up in-house hedge funds.

This is falling back on the populist belief that banks are entirely responsible for the current economic situation when in fact there is lots of blame to go around.
Forbes:
Though the roots of the financial crisis were in lax loan underwriting, followed by lax underwriting of derivative products containing those loans and a poor grasp on the exposures banks were amassing on their books, the administration is relying on populist outrage to regain momentum. ...
Legislators responsible for pushing the proposals through Congress lined up in support on Thursday. Connecticut Sen. Christopher Dodd, who is not running for re-election but who heads the Senate Banking Committee, said in a statement, "I agree with President Obama that taxpayers should not be underwriting these risky activities. Companies that choose to take such risks should do so on their own dime and not in a way that threatens the stability of our economy."

Let's have a look at what Obama and his buddies were saying a mere 12 months ago. Compare and contrast:

Even before he appeared on the Hill, Obama was laying groundwork to avoid a TARP train wreck. In a letter sent on Monday to congressional leaders, he pledged to devote much of the second installment to assisting small businesses and helping students and car buyers get loans. In personal calls to members on both sides of the aisle he promised better transparency of how the funds are disbursed, reflecting the frustration and anger of many members regarding the Treasury Department's handling of the funds.

Obama was convinced that TARP needed to pass in order to save the American economy. Why?

Karl:

Barack Obama’s first major step on the campaign trail — in December 2006 — was to Wall Street, where he snagged the backing of convicted inside trader George Soros and investment banker Robert Wolf, who became CEO of UBS Americas. Before the Wall Street meltdown got into full swing, Swiss banking giant UBS had written off more debt from the subprime mortgage crisis than any other bank; a number of Obama's top bundlers came from with firms mired in that mess. Such bundlers raised at least 22 percent of Obama’s money during the first half of 2007, and got perks from the Obama campaign. Indeed, Obama’s national campaign-finance chairwoman, Penny Pritzker, helped run Superior Bank — which was at the forefront of securitizing of subprime mortgages, until it collapsed in 2001.When Wall Street went into meltdown mode, the establishment media ignored that Obama got big donations from associates of Fannie Mae and Freddie Mac, and was one of the all-time recipents of political cash from Lehman Brothers. Before the election Obama voted for TARP. After the election, Obama twisted arms to get the second half of the TARP money, and packed the key economic positions in his White House with the very people who caused the financial crisis in the first place.

Robert Wolf of UBS is advising President Obama on economic matters. According to the WSJ, Wolf has visited the White House over 20 times since Obama was elected. How did this relationship come to be? The two men first met in December 2006 in the New York office of billionaire investor George Soros. Mr. Wolf was a newcomer to elite Democratic donor circles. Then-Sen. Obama, still months from launching his bid for the White House, was desperate to raise campaign cash on Wall Street. It goes on to say that Wolf was responsible for a hefty sum of donations to the Obama's campaign. What is Wolf's agendaItalic? Considering that he met Obama through Soros (who worked with Nazis to round up fellow Jews for deathcamps during WW2) SMW is a bit wary. The WSJ sheds some light on Wolf's ambitions:

Mr. Wolf's chief obsession, White House officials say, is pushing a national infrastructure bank that local governments and the private sector could use to fund big projects like bridges and water-treatment plants—an idea first championed by the Clinton campaign. He has had less to say on the issue closest to his industry: the drive to tighten regulations on the financial sector.

I bet. As public opinion turns against Obama he is grasping at whatever he can to whip up public outrage directed at anyone other than himself. The ground is even getting shaky for some of his own appointees:

With Democrats scrambling--and divided--in their efforts to tame Wall Street, Treasury Secretary Timothy Geithner (who is said to have initially opposed the measures outlined in the proposals Thursday) has become a fatter target, too. Along with Bernanke, critics continue to lash Geithner for his role in the AIG bailout. He was president of the New York Fed in the fall of 2008 and a central figure in the negotiations between AIG and its credit default swap counterparties, which were paid off in full rather than at a discount.

It should come as no surprise that the markets did not react well to Obama's seemingly sudden announcement that he was going after banks. However, those who have been following Obama closely should not have beenItalic caught off guard by these antics. The market is extending losses that gave the Dow Jones industrial average its biggest two-day drop since June. Upbeat earnings from General Electric and McDonald's provided a positive note but weren't enough to keep major indicators out of the red. European markets did not fare any better on Friday:

Worried investors sent European bank shares tumbling on Friday as concern mounted about the impact of the increasingly hostile climate as governments around the world seek to curb perceived bank excess.
While analysts were divided on which foreign banks would suffer the most if the proposals were adopted, many warned the flurry of reform was destabilising the entire sector.
“New regulations are being proposed thick and fast and the industry faces major uncertainty from these,” wrote Nomura’s Raul Sinha in a note. “The latest proposals are only a week after the announcement of the tax on wholesale liabilities. What’s next?”

Over in the SquareMile things are a bit skiddish. Yesterday headlines were screaming that Brown was "very uncomfortable" with Obama's plan. Today it is a different story. As Iain Martin of the WSJ says, the British government is "all over the map" on this one:

The contradictory statements emerging from Whitehall illustrate how much of a shock President Obama’s dramatic announcement on bank reform was to the British government. Obama proposes to break up the megabanks and put limits on the size of institutions and their trading activities. This was a u-turn by the administration and is not at all in line with what the British government wants.

The Obama administration is proving to be amateurish at best when it comes to dealing with global markets. Coming out with a major surprise announcement that impacts global markets is not a way to increase consumer confidence and market stability. With more housing foreclosures expected in 2010 and the job market showing little improvement it may seem easy for people to jump on this populist bandwagon and crusade against the banks, but they will be doing so at their own peril.