Obama says a fight with Wall Street is a fight he’s willing to have, but the truth is, I know he doesn’t mean it. He won’t fight with the Iranians, Al-Queda, or the anti-American wing of his own party, and they’re all doing great harm to his political image. So he’s certainly not going to fight with someone like me.
If you ask me, I don’t think Obama's image as a sneering condescending law professor is the kind of thing that lends itself to anti-wall street populism. And to perfectly honest about it…I think I can take him (both physically and intellectually) so if he wants to throw down then I’m not going to miss my chance. Risk management is an expertise which takes ages to learn and he's had no chance to learn it. In the meantime... like the man said... 'that just my game'. So let me tell you what’s going to happen with the president’s new populist move to limit bank risk.
Goldman Sachs, Bank Of America, JP Morgan and all the other big money center banks will simply divest their deposits and the business units that manage them. Their “banks” will become subsidiaries of much larger financial firms which will still engage in highly leveraged activities. They will no longer be able to combine their balance sheets, but they will be able to lever the equity holdings that those banks represent, so very little will change. That’s how it was before glass-Steagall. And that law didn’t have anything to do with the recent market turbulence.
As is usually the case with liberal policies, this move won’t do one thing to accomplish any of the goals that Obama said it would. It won’t make the financial system any more stable, and it will do nothing to promote economic growth. On the contrary, over the short term it’s going to inhibit growth. The financial system will be forced to reduce its cumulative leverage somewhat, and that will push interest rates up and stocks down. It won’t increase lending at all because without the support of their highly profitable investment banking operations, the new banks will be less willing to submit to further extortion from ACORN and the like that had in the past pushed them into lowering their credit standards.
The good news about this however is that it will effectively eliminate the moral hazard created by commingling the government and the banks. The big excuse for bailing out the financial system in the first place was that it’s the channel used by the Federal Reserve for managing the money supply. In effect the bailout was really to designed to support the fed, not the banks themselves. And undoing that link will make it much easier for the winners to win and the losers to lose.
When Obama realizes that, he’s not going to like it. He’s not going to like the fact that this will limit his influence over the financial system. The next time he calls the banks in to tell than that he’s the only thing between him and the pitchforks, under this new rule they’ll probably tell him to take his pitchfork and shove it. And that’s how it should have always been if you ask me.
The most overworked phrase in finance this week will be that ‘the devil is in the details.’ It’s a good thing to not have banks too closely linked to the government, but given Obama’s prior agenda, we’re all having trouble believing that he means it. We’ll see. If we get a bill that can fit on a single page it will be fine and we’ll probably all be for it, but if we get a 12,000 page behemoth filled with pork, earmarks, and a wealth of new rules, regs and taxes (like we would expect from this congress) then it will be a disaster.
I guess we’ll see.
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