Wall Street Influence Diminishing?
More from Doug Terry:
It struck me this weekend that a new, under–the-surface debate may be brewing. I sense Wall Street, once the puppet-master of the government intervention to save the banking system may find itself with diminished influence.
Let’s go back 5 months: AIG, Fannie Mae and Freddie Mac were deemed “too big to fail.” We all remember the sweat on Paulson’s brow and former President Bush’s infamous comment to the American people:
At first, I thought we could deal with the problem one issue at a time,” Bush said. “The house of cards was much bigger and started to stretch beyond Wall Street. When one card started to go, we worried about the whole deck going down.
At that time Wall Street executives had the administrations ear:
As the New York Times reported last year, Goldman was AIG’s largest trading partner and CEO Herb Blankfein was in the room when the AIG bailout was hammered out by Geithner.
Themes in this past week and weekend’s press indicate the tide has perhaps changed as the government is now realizing the extent of these banks insolvency; the bailout is becoming prohibitively costly and politically unpopular.
There is a new administration in town. Should Wall Street be nervous? Here comes the “Stress” Test.
As Simon Johnson indicates there is a noticeable change in rhetoric with the Obama administration:
Secretary Geithner was much more critical of bankers and their compensation schemes than officials have been to date. And President Obama is clearly angered by bankers’ arrogant bonuses. The Administration’s messages of transparency and accountability are refreshing and exactly on the mark.
And I liked this line from Geithner:
These banks need to understand that access to government resources is a privilege, not a right. It’s not for the banks. It’s for the people, and companies depend on that.
The proposed stress test by Tim Geithner will give us some transparency.The results of these tests will determine the level of insolvency of the banks:
- In need of “Capital Assistance”
Wall Street is to lobby the Obama administration to relax its plans for stringent reviews of banks’ financial health and capital injections that could leave the government as a large shareholder in many of those institutions.
Banks’ worries were reinforced last week when Tim Geithner, Treasury secretary, cancelled a meeting with Wall Street chiefs.
Another sticking point is the authorities’ plan to buy convertible preferred shares in banks deemed to be in need of capital following the “stress test”.
Banks argue that the sale of preferred shares, which, if converted, would give the government a sizeable stake, would amount to a “creeping nationalisation” of the sector.
The 2 year/worst case scenario testing for these banks would appear problematic. And private equity sharks may smell blood.
The industry’s [wall street’s] frustration contrasts with the cautious welcome given to Mr Geithner’s plans by private equity and hedge fund groups. The government package contained two items at the top of those investors’ wish-list: financial assistance to purchase toxic assets from banks; and a guarantee to cover some of the losses on those assets.
As good friend and fellow market watcher Tim Dodge reminds me players such as George Soros were large supporters of the Obama Presidential Campaign.
Other press indicating these banks future is looking tenuous. From Housing Wire:
The most cost-effective and quick way to address the nation’s financial problems would call for the Treasury Department to start breaking up the largest banks and selling off individual operations to the public sector, according to the executive of an independent community bank. Rusty Cloutier, the president and CEO of MidSouth Bank (MSL: 9.00 -2.70%), recently told major news outlets that “[c]oncentration is a bad thing” and called for the feds to break up the “miserable eight” largest banks that, he said, control 60 to 64 percent of the country’s assets, restoring competition to the banking industry and restoring investor confidence in the system. “The money is going to sit on the sidelines until [regulators] announce they’re going to do something with these [big banks],” Cloutier said, according to statements released Monday by the bank. “Nobody is going to put fresh capital into the banking business when your major competitor is going to be continuously bailed out by the United States government with more and more money.”
From Bill Moyers:
Johnson believes that the U.S. financial system needs a “reboot,” breaking up the biggest banks, in some cases firing management and wiping out shareholder value. Johnson tells Bill Moyers that such a move wouldn’t be popular with the powerful banking lobby: “I think it’s quite straightforward, in technical or economic terms. At the same time I recognize it’s very hard politically.”
Without drastic action, Johnson argues, taxpayers are merely subsidizing a wealthy powerful industry without forcing necessary systemic changes: “Taxpayer money is ensuring their bonuses. We’re making sure that banks survive. And eventually, of course, the economy will turn around. Things will get better. The banks will be worth a lot of money. And they will cash out. And we will be paying higher taxes, we and our children, will be paying higher taxes so those people could have those bonuses. That’s not fair. It’s not acceptable. It’s not even good economics.”
My comment: Maybe the trade off here is that Obama raises the tax on carried interest but favors the private equity/hedge fund guys in managing the banking problem. If they get the bank assets at a low enough price, they won’t care as much about the increase in tax on carried interest. It might also be that Obama and the hedgies don’t expect the higher tax on carried interest to survive Congress. It was beaten back last time by Chuck Schumer who gets major campaign cash from the industry.