New Financial Regulation Greeted With Market Meltdown

by: Wall Street Strategies

By Charles Payne

It's all over but the crying and the selling. Financial regulatory reform has been pushed through, and in the end, "too big to fail" is still "too big to fail." But, fear not, there are more layers of government to make everyone feel all warm and fuzzy. Going into this I thought the goal was to address all the reasons the economy ran aground. I thought the idea would be to bring behemoths to their knees ... all of them. However, there are a couple of glaring omissions.

Freddy Mac (FRE) and Fannie Mae (FNM)

It is the height of hypocrisy to claim the system is now fixed when this mother of all ticking time bombs doesn't warrant additional oversight or urgency for dismantling. I was lying, I didn't think the goal was genuine. I knew this was another massive power grab under the guise of helping Main Street only to punish Wall Street.

Similar to healthcare, which in the end will cost trillions more than advertised, this new financial law will hamper commerce, while those lumbering giants on Wall Street never miss a beat. Sure, the Volcker Rule hurts their pocketbooks, but it means nothing to depositors and would-be borrowers at 99% of all commercial banks. The White House's goal was to establish and then burn at the stake a straw man, and Wall Street was the perfect foil. The "ridiculous spectacle" of Wall Street versus the White House has been a big distraction and waste of time. Will the lending floodgates open tomorrow?

On the topic of floodgates, that gusher of selling in the final minutes of trading was an appropriate exclamation to the financial regulatory reform bill moving forward. I hope President Obama was watching it for what it was and not for what it could be, because I'm tired of being sold and need someone with power to lay it on the line.

A state attorney general lies on several occasions about fighting in Vietnam, and he comes out swinging at the bad treatment of vets. I know the administration has tunnel vision and could weave a tale better than David Mamet in his dreams, and it's okay if they want to ignore the Tea Party and twist all economic data, but it's time to listen. It's time to be honest and acknowledge redistribution of wealth (always a bad idea) is simply too dangerous during economic fragility, and it's time to really focus on job creation.

No more created or saved jargon, and forget about the self-congratulatory pats on the back for a good month, when it's only a drop in the bucket and barely more than needed to stay ahead of population growth. A persistent claim for initial jobless benefits is a shame. It proves one of my worst fears, that there will be a permanent underclass of formerly proud American workers locked out of the jobs market save for periodic (paid) training programs and solar panel installations.

The Whole Ball of Wax

On the topic of being permanently unemployed, a monster grab bag of goodies is being readied to raid the public coffers and add to the deficit before Congress goes home for summer vacation. This bill is a monster and could tally $200+ billion. It covers another extension of unemployment benefits and pushing that doctor's fix down the road to 2014 (for now).

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There will also be funding for:

  1. Build America Bonds (infrastructure spending)
  2. R&D research tax credit for one year
  3. Depreciation for farm machinery and equipment
  4. New Marks tax credit for one year (to generate private investment in low income communities)
  5. TANF benefits extension

Some of the cost is expected to be offset with another attack on businesses.

  • Investment managers "carried interest," currently taxed at a top rate of 15%, will now see 75% of the interest taxed as regular income with a top rate of 35% and 39.9% in 2011. Included in this are hedge fund managers and venture capitalist. It is expected to raise $20 billion over 10 years.
  • Multinational companies will be taxed additionally, in hopes of raising $14.5 billion.
  • There will be a $0.08 a barrel tax on oil companies to finance the Oil Spill Liability Trust Fund.

Nancy Pelosi says:

[The Bill will] create jobs, prevent outsourcing jobs overseas and close loopholes to corporations and wealthy individuals.

This bill adds to the deficit, kills jobs and punishes the most competitive of businesses. It's fine to help, but true help isn't making people dependent and killing desire to fight out of this jam.


I will admit to being torn about the current situation. I abhor fiscal and monetary policies and the attack on prosperity. I don't understand a world where people that create wealth are maligned and attacked relentlessly.

America isn't the one Upton Sinclair described in "The Jungle;" it's not a place where people toil in sweatshops. Free markets and capitalism forged a nation that has become the envy of the world. Instead of tearing it down, we should tweak it and make it better. With official inflation readings being non-existent, I though the market could hold up. Of course a correction was overdue and the rally itself was dubious in many ways.

Aside from being driven by so-called green shoots, there was never any conviction via volume, and corporate insiders didn't buy their own shares even at multi-year lows. Be that as it may, trends are powerful things, and the hype machine of the general media, eager to help the White House, worked like a well-oiled public relations machine.

Then there are the easy comparables, cash on the sidelines and lack of competition for real returns. But the atmosphere is focused on safety and not on making money. This is where we are now ... where the big boys have begun seeking out shelter from political attacks and economic frailty.

The punitive agenda was always going to crush the nation, but I thought it would take longer. This is a $14 trillion economy after all, but I'm not sure what the timeline is now.

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The real problems in America are reflected in the ever-growing Problem Bank list complied by the FDIC. In the second quarter of 2006, there were 50 problem banks with assets of 45.5 billion, and now there are no less than 775 with assets of $431.0 billion. With housing teetering again and jobs still elusive, it is unlikely banks are going to step up lending. Add in some of the measures in the Financial Regulation bill, and capital isn't going to get to Main Street and a lot more banks will go out of business.

I think the market is oversold, but would-be buyers know it can go lower, so they are waiting and salivating. This week/month is an example of how quickly the wheels can come off a rally built more on anticipation and rationalization. I also think it's a harbinger of what will happen unless relentless attacks on capitalism and success stop.

Disclosure: No positions