Obama’s Gamble:
A return to Glass-Steagall will not harm the present-day economy
At the outset of this article, I want to be clear. This is about capital to support loans. It's about competing with large international banks. It's about the need to support a large economy.
On Thursday, President Barack Obama floated his plan to separate so-called risky proprietary trading by banks from their regular banking business. The stock market sold off and continued the selloff on Friday, but there was other bad news on Friday which also influenced the selloff. The President clearly listened to his advisor Paul Volcker who pushed the idea.
My question is this: if the profits from proprietary trading are taken away from the banking side of the business, if the option to break up large financial institutions is put into play, isn't that taking away capital needed to provide the leverage necessary to make more loans, both commerical loans and housing mortgages? Sure, proprietary trading back in 2007 was dangerous when banks held CMOs, CDOs, and CDSs they could no longer dump on unsuspecting investors, resulting in massive writedowns. But it can be argued that those investment losses weren't incurred due to the same kind of initial risky bets that can be likened to hedge fund investing practices. The banks simply ran up against unexpected decreased demand from investors for those CMOs and the like, the real cause of their being stuck with these toxic assets. Furthermore, are banks solely to be punished, letting fraudulent rating agencies, greedy mortgage brokers, and lying home buyers who were closet NINAs (no income, no assets) off the hook?
It is my contention that President Obama may be risking a slower recovery in housing (already slow) and the economy because of potential reduced lending that his proposal could bring. He is also risking losing banking business to large foreign banks who may not come under restrictive regulation.
President Obama may be gambling that Mr. Volcker understands the situation. Volcker doesn't think banks should gamble with depositors money. Does he (Volcker) think commercial lending in a slow economy is any less risky than trading in the stock of the nation's large public companies?
I have read Charles Gasparino's The Sellout and Brian Wesbury's It's Not as Bad as You Think. Clearly some bank officials were greedy and reckless during the years leading up to the 2007-2008 credit crises. But this throwback to a Glass-Steagall era of the 30s may not work in our greatly-expanded present-day economy with lending needs that small community banks cannot meet. At the very least I don't see how it will help large financial institution profits and their capital requirements. It shouldn't be overlooked that financial institutions make up 20% of the S&P 500 index.
As far as asset management strategy is concerned, I believe it prudent to continue the strategy of having no individuval stock investments in US financial institutions, other than what our best-in-class mutual funds might own.
|
Subscribe to our Newsletter
