
Obama Plan Creates Investor Quandary
NEW YORK (
) - Whether this week's stock sell-off is a foreboding sign for the financial industry or a major buying opportunity depends on how much weight one puts in political promises.
Major market indexes were
tumbling
in afternoon action on Friday, but have lost roughly 3% since the sell-off began three days earlier and have given back 2010's early gains. Stocks have been weighed down in part by concerns about continued credit losses in earnings reports from the major banks over the past week. But the downward spiral in the group gained velocity on Thursday when President Obama outlined a plan to restrict the size and activity of the country's financial heavyweights.
"Never again will the American taxpayer be held hostage by a bank that is 'too big to fail,'" Obama said in his comments on Thursday, later adding "if these folks want a fight, it's a fight I'm ready to have."
But despite all the populist rhetoric and Robin Hood-like pledges, there are big hurdles that stand in the way of passing anything that looks like what Obama has laid out so far. As they stand, the roughly sketched proposals would hinder economic recovery, hamper America's ability to compete with foreign financial firms, and potentially put additional costs at consumers' doorstep.
Taking from the rich and giving to the poor may be a noble idea, but any realistic reform would have to take into consideration America's protectionist, competitive streak as well as the populist flavor of the day. It would also have to budge to not just political opposition from free-market-minded Republicans, but also from an industry that's just as willing to dig in its heels for a fight as Obama is.
Steve Bartlett, head of the Financial Services Roundtable, an industry lobbying group, attacked the plan, calling it "inconsistent" with the administration's other goals.
"The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs," said Bartlett.
But given the horse trading that has gone on with other financial-reform proposals -- not to mention what has happened with the now-derailed health-care reform -- and the country's apparent political shift to the right, there may not end up being a fight to be had. Even the Consumer Protection Agency appears like it may be shelved just to get a financial regulatory reform plan through both houses of Congress. The agency was a linchpin of Obama's broad plan that consumer groups lauded and banks fought tooth-and-nail to oppose.
The reason for its ultimate scrapping is simple: Politics.
Polls and anecdotal evidence have shown for some time that voters are dissatisfied with the way things are going in the country, and Democrats are in charge. Americans are disappointed that the "Change" platform Obama used to glide into office hasn't yet come to fruition. Since then, joblessness, foreclosures and bankruptcies have risen, while wealth, home prices and optimism have declined.
A recent poll by
The Wall Street Journal
and
NBC News
found that voters are already less supportive of Obama and no longer favor a Democratic majority in Congress. And it was viewed as a startling rebuke when the typically ultra-blue state of Massachusetts voted in a conservative underdog candidate, Scott Brown, in a special election. The initial reaction was, If Ted Kennedy's former Senate seat can go to a conservative, is there any hope for Democrats?
An ironic twist to the election is that it halted progress on the health-care reform bill that represented Kennedy's legacy. The bill was moving toward Senate passage, and a competing version had moved through the House, but the Republican win rescinded Democrats' filibuster-proof majority.
With voters turning their backs, and health-care reform in a rut, the next obvious strategic move for Democrats is to target the financial industry, whose popularity among taxpayers is at least as low that of the Internal Revenue Service.
Or, as RBC Capital Markets analyst Gerard Cassidy put it in a note on Friday: "Everyone hates the banks."
Voters dislike the multi-billion dollar bailout packages they required, much of which still hasn't been repaid, and none of which has shown tangible benefits to the Average Joe. Voters' TARP hatred may be second only to the multi-billion dollar profits and bonuses that banks quickly reported after recovering with the aid of taxpayer support.
Voters also blame financial firms for many of their woes. They see bankers as greedy predators who collect fees, give terrible financial advice and evict people from the same homes they were lured into buying.
According to this populist view, to which Obama apparently ascribes, there isn't much good about the banking industry, and it deserves to be punished for its dastardly deeds. He proposed rules that would prevent banks from capital markets activity that does not directly serve customers, and from having any dealings with private equity and hedge fund firms. Obama's proposal would also limit a bank's size and growth potential by capping liabilities like deposits and loans.
Thursday's plan is just the latest in a string of seemingly punitive measures against banks. It comes after months of maneuvering to restrict compensation, and weeks after another proposal to collect $90 billion in fees from select institutions over a period of 10 years. The fee would be intended to make up for losses on the $700 billion bailout program and punish the industry whose practices helped create the crisis. (Nevermind politicians and regulators who are guilty of lax oversight, but aren't facing penalties or campaign-donation clawbacks.)
While its genesis is understandable, the proposals have
a few logical gaps.
They are aimed mostly against banks that aren't the money-losing investments, but rather the profitable ones. Loss-leaders, including government-owned mortgage financers
Fannie Mae
(FNM)
and
Freddie Mac
(FRE)
and automakers General Motors and Chrysler, wouldn't be required to pay the fee, and wouldn't be affected by Thursday's announcement. Many small depositary institutions would be exempt too, though their heyday practices could very well have been the same as large firms like
JPMorgan Chase
(JPM) - Get Report
,
Bank of America
(BAC) - Get Report
,
Wells Fargo
(WFC) - Get Report
,
Goldman Sachs
(GS) - Get Report
, which paid back TARP with a significant profit.
Furthermore, the lack of detail in Obama's plan, and the abundance of populist rhetoric in his speech, adds credence to the notion that it's just a political ploy. Brookings Institution Fellow Douglas Elliott noted inconsistencies in the administration's goals, and that the roughly sketched proposals do not consider the complex nature of the problems they seek to address.
"The issues being addressed are complicated," he said in
an analysis on Thursday. "This is a classic example of the devil being in the details and many of those details are simply unavailable."
Elliott goes on to note the benefits of a diverse business model for large institutions, and that there are better ways to address the risks inherent in their size. Additionally, taking part in profitable market activities make banks healthier, less reliant on consumer fees, and better able to compete with foreign institutions that don't face the same operational restrictions.
As an expert politician and a smart guy, Obama is probably aware that a plan to hatchet up the country's biggest banks would take more than a speech and a few bullet points. If he's simply using the industry as a scapegoat to garner votes in November, investors have little to worry about. If it's truly the start of a battle to
turn the industry back 75 years, as the market reaction suggests, it's unlikely to succeed anyway.
KBW analyst Frederick Cannon noted on Friday that the stock market's turn is an inverse reflection of what happened in the fall of 2008. Each leak of a new detail in the government's plan to save the banking industry was met with a stock rally for a day or two, which was quickly reversed as investors deemed it inadequate.
Now the Obama administration appears to have a weekly plan to "punish surviving banks with new taxes and regulations," as Cannon puts it. The plans are initially met with a day or two worth of selling, followed by another stock rally as investors look ahead to bank profits in a potentially strong recovery. He doesn't expect Congress to actually adopt rules that would force banks to significantly whittle down their businesses.
"A sell off following a new government plan to punish the banks creates a buying opportunity," says Cannon, who notes that "the timing of the announcement and the lack of specificity are indications that the Administration's proposal is more of a political statement than a serious legislative proposal."
-- Written by Lauren Tara LaCapra in New York
.









