President Obama played the populist card Sunday on 60 Minutes, saying, “I did not run for office to be helping out a bunch of fat-cat bankers on Wall Street.” Monday morning, he met with the very bankers he slammed. None of them seemed to be upset by his words, judging from the smiles on their faces. It looked to me like business as usual.
Meanwhile, the most restrictive financial regulation since the 1930s was passed by the House on Friday. It’s another pile of bureaucracy. There’s no overhaul of Fannie Mae and Freddie Mac, or necessary commercial bank restrictions, and there’s nothing about a strong dollar policy requirement for the Fed.
This is Barney Frank’s bill. So to understand it, let’s take a trip down memory lane. Remember, it was Barney Frank who vehemently resisted more controls over Fannie and Freddie, saying in 2002, “I do not regard Fannie Mae and Freddie Mac as problems.” In 2003 he said, “We see entities that are fundamentally sound financially … And even if there were a problem, the federal government doesn’t bail them out.” Funny how that’s exactly what happened as taxpayers bailed out Fannie and Freddie to the tune of $200 billion, while taking on their $5.4 trillion in debt and other liabilities.
Looking back, The WSJ quoted Mr. Frank as saying one of the reasons he liked Fannie and Freddie so much was that they were subject to his political direction and that he used them to do his bidding during the start of the housing crises. “He encouraged the companies to guarantee more ‘affordable’ mortgages, thus abetting their disastrous plunge into subprime and Alt-A loans. He also pushed for, and got, an increase in the conforming-loan limits to allow Fan and Fred to securitize and guarantee larger mortgages. And he pressured regulators to ease up on their capital requirements-which now means taxpayers will have to make up that capital shortfall.”
Here are Paul Volcker’s thoughts on the crisis and Wall Street in this week’s WSJ: “All I know is that the economy was rising nicely in the 1950s and 1960s without all of these innovations. Indeed, it was quite good in the 1980s without credit-default swaps and without securitization and without CDOs.” He goes on to say that commercial banks are at the heart of the system but that he thinks “it is extraneous to that function that they do hedge funds, equity funds and that they trade in commodities and securities, and a lot of other stuff, which is secondary in terms of direct responsibilities for lenders, borrowers, depositors and the rest.”
The Federal Reserve’s single most important role is to maintain the dollar’s value. A peg to gold would be a good idea. Unfortunately, politicians don’t like the discipline this requires. The longer Federal Reserve chairman Ben Bernanke procrastinates in raising rates, the more difficult maintaining a strong dollar will be. The last thing Washington wants before the midterm election is higher rates rocking the boat. And the same is true for Wall Street. As David Malpass writes, “The Street utterly loves the Fed’s largess, earning massive profits from trading unstable currencies, the carry trade (borrow short-term dollars near zero, buy longer-term assets abroad), and the high-margin process of transferring America’s capital abroad.”
When Chris Dodd’s plan comes out of the Senate, expect it to be weak on hedge funds since he’s the largest hedge fund industry beneficiary currently serving in the Senate. Also, let’s not forget his involvement with Fannie Mae and Freddie Mac. He was the #1 campaign contribution recipient identified in a Federal Election Commission report titled “Fannie Mae and Freddie Mac Campaign Contributions from 1989-2008.” Is it any surprise that the next leading recipients were John Kerry, Barack Obama, and Hillary Clinton? As the 2008 bailout was announced, Dodd had a lot of heart when he said in a Bloomberg interview: “I have a lot of questions about where was the administration over the last eight years.”
This plan is about Washington and Wall Street. As we wait for the Senate version, so far all I see is more bureaucracy and very little in terms of risk controls. Expect more pain ahead.
E.J. Smith is Managing Director of Richard C. Young & Co., Ltd. an investment advisory firm managing portfolios for investors with over $1,000,000 in investable assets.