Feds to Wall Street: You're Scum; Let's Be Partners

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Includes: DIA, QQQ, SPY, XLF
by: Gary Townsend

If the new administration’s plans for you and me are so good, why has the market’s reaction been so consistently bad?

I’ll add my observation to others’ that, since President Obama’s election, the wealth destruction has been staggering. As of March 20, the S&P Index is down 23.6%, and the KBW Bank Index (BKX) has declined an even more remarkable 58%. That works out to a $446 billion fall in the market capitalization of 24 money center and regional banks.

“President Obama? Are you listening?” Great line, that. But is he? Rather, it’s clear that he’s sticking to his playbook, however antagonistic to capital formation, however stifling to personal initiative and responsibility his proposals, whatever the collateral damage might be. What I hear is, “I’m from the government, and I’m here to help.” Tea anyone?

Unfortunately, there’s precious little confidence-building ongoing here in Washington. It’s not even clear that the administration or the Congress sees boosting investor confidence as its particular responsibility. The President sees no reason to trouble himself with the market’s “gyrations.” That would be reasonable enough if the gyrations weren’t all headed in just one direction. Obama press secretary Robert Gibbs speaks of an “investor class,” as if only Republicans have a 401(k). And last week, the administration’sAIG bonus outrage, however contrived, torpedoed its happy talk of the week prior. At the other end of Pennsylvania Avenue, the Congress finds its time well-used in a day-long inquisition of eight financial services CEOs. Not to be outdone on AIG, the Congress took its dudgeon to new heights, both rhetorically and legislatively. Let the decibels ring, or so our idle Congress seems to say. A follow-on grilling of Bernanke and Geithner is scheduled Tuesday.

With regard to AIG, we taxpayers have an $80 billion investment in the form of a high interest loan. Repayment is predicated on minimizing the cost of unwinding the remaining CDS in its Financial Products Group portfolio, while preparing for sale and maximizing the value of the company’s other business units. So for my money, I’m fine with the expenditure of $165 million in bonuses if, in the aggregate, costs are adequately constrained and value is preserved through the retention of customers and key personnel. So how did last week’s drama before the House Financial Services Subcommittee on Capital Markets serve taxpayers’ interest? The aphorism that legislatures are meetings of idle people is surely wrong. Idleness would be less damaging.

And next, the administration rolls out its “Public-Private Partnership” proposal to subsidize the purchase of as much as $1 trillion in so-called “toxic assets.” And the purchasers will be? Wall Street! European and Asian banks! Middle-East sovereign wealth funds! Hedge and private equity funds! Investment banks! Our Treasury Secretary will tout that anticipated returns are 10% to 12%, or more!

But average taxpayers are struggling for 2% to 3% returns on their savings, and have suffered massive investment losses in their retirement accounts. Mark my words. As the details emerge, the public backlash will make the AIG fiasco seem like small beer.

Roll the tape six months forward and it’s easy to visualize another Congressional hearing with a new group of “profiteers” (readers are invited to substitute their favorite pejorative) raising their right hands in sworn oath--assuming, of course, that there are private investors foolish enough to join with such a vacillating and unreliable public partner.