Obama's Misdirected Attack on Wall Street

NEW YORK ( TheStreet) -- President Obama's second trip to the Wall Street area over the past year evokes a little bit of classic American literature -- perhaps appropriately so.
Obama
President Obama

"I believe that on the first night I went to Gatsby's house I was one of the few guests who had actually been invited," says Nick, the narrator in The Great Gatsby, F. Scott Fitzgerald's tale of wealth and its pitfalls. "People were not invited -- they went there."

Obama is bringing the battle to New York thursday, heading to a college in Manhattan outside the financial district to garner public support for a rigorous overhaul of the way the financial sector is regulated. Unsurprisingly, Wall Street isn't exactly rolling out the red carpet.

The emerging laws -- still winding their way through Congress -- are sure to be tough on the financial sector. The bill will target large, money-center firms that are considered "too big to fail." It proposes a tidy resolution process in case they do, and forces them to pay a fee to enjoy the benefits of such a status.

Other measures are set to throw a regulatory net on the "shadow financial system" -- financial firms and products that now evade the burden of oversight. The bill is also poised to crack down on compensation practices that have become a political lightning rod.

Obama's team initially proposed the reform package shortly after his inauguration. On his last visit to the area, he came directly to Wall Street's door to tell the banks he meant business. Now, he's taking his message to voters, and with good reason.

The progress of Obama's proposal has been painfully slow, marred by partisan bickering and delayed by Republican intractability, even on measures the party had initially suggested. As the debate carries on, six of the country's largest banks -- JPMorgan Chase ( JPM), Bank of America ( BAC), Citigroup ( C), Wells Fargo ( WFC), Goldman Sachs ( GS) and Morgan Stanley ( MS) -- reported $18.9 billion worth of net income over the past two weeks. Most relied heavily on capital markets activity -- rather than struggling consumer businesses -- to boost the bottom line. They also took advantage of low funding costs, thanks to the Federal Reserve's 0%-0.25% interest rate policy.

The American public, meanwhile, has continued to face joblessness, foreclosures, and declining home values in most parts of the country. When they look to political leaders for assistance, they're met ineffective programs that have taken months to implement, and partisan finger-pointing over who's to blame. When they look to the media for clarity, they're often met with a cacophony of talking heads.

As midterm elections approach, and the public becomes increasingly fed up or bankrupt, Obama's purpose is clear: He must re-energize his base and bolster support along the center line. As the scapegoat du jour, the financial industry provides the perfect platform for his campaign.

However, if leaders on either side of the political aisle want to woo support, they're going about it the wrong way.

It's difficult for people to understand why the system nearly collapsed, why banks received a $787 billion bailout package, why the housing market imploded, or why jobs have evaporated into thin air. (Explaining the dynamics of a collateralized debt obligation in a sound byte is nearly impossible.) Instead, politicians vilify the industry by saying it's full of "fat cat bankers" and file flimsy fraud charges against Goldman Sachs, which has become the emblem of corporate greed.

The nuanced version of that story may be more complex but it may also do voters more good to understand. The financial crisis -- along with the ensuing bailouts and job losses -- occurred because a complex web of greed and idiocy fell apart. Banks bear a heap of responsibility for the calamity, but so do regulators, ratings agencies, Congress and even homeowners themselves.

To avoid a collapse of the entire system, the government quickly handed out a wad of cash to a handful of enormous financial firms. It then lent assistance to smaller counterparts, and even some struggling companies outside of the banking sector. It bent rules and used authority that didn't even exist at times to prevent a much larger tragedy.

Now, while the banks are seemingly back on their feet, millions of homeowners are still struggling. The programs set up to help them are taking far longer to produce similar results, which is unsurprising given the size and complexity of the problem. It took the housing crisis several years to build up, and each individual mortgage has a unique borrower with unique circumstances.

What's important to remember is that the big banks play a pivotal role in the economy. They provide financing to companies that employ American workers, and loans to qualified borrowers who want to buy a home, car or education, but don't have the cash on hand.

They also help keep taxes low by raising money for the U.S. government and keep interest rates low by creating conduits for money to flow through more cheaply. The financial industry also employs people and pays taxes itself; an estimated 8% of working New Yorkers earn their keep on Wall Street, and 40% of the city's business and personal income taxes come from the sector.

It's understandable that Americans are angry at bankers who are earning big bucks at firms that exist with the help of their tax dollars. But the real reason banks are getting pilloried is that they have evolved into an easy target for politicians with unemployment still hovering around 10%.

At the moment Washington seems bent on hurling blame for the crisis on the banks, while ignoring the role they've played in the economy's comeback. But lawmakers, President Obama included, should be careful about finding fault with banks turning a profit. That attitude might lead them to undermine the part the industry still has to play in things getting better from here.

-- Written by Lauren Tara LaCapra in New York.

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