Economic Outlook: Another line in the sand

By ANTHONY HALL, United Press International  |  Jan. 22, 2010 at 8:05 AM
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President Barack Obama's proposal to separate government-insured banking from risky investing opened a new battle front between Wall Street and Washington.

Although proprietary trading accounts for a small portion of revenue at Bank of America, JPMorgan Chase & Co. and Wells Fargo & Co., the investments account for 5 percent of the total for Citigroup and Morgan Stanley and about 10 percent for Goldman Sachs, The Wall Street Journal reported Thursday.

Even though such trading represents a minor portion of business for some banks, it is not a niche banks will give up without a fight. One chorus of responses denounced the plan as one that simply missed the mark.

"Let's not be finding a bogeyman so that we can turn public attention away from what they're doing wrong in the administration," Sen Jon Kyl, R-Ariz., said.

Goldman Sachs Chief Financial Officer David Viniar said "if people are focused on things that caused or were real contributors to the financial crisis, it wasn't trading."

But in the thick of the bank reporting season, Obama said he was ready to rumble. His proposals came within a week of his declaring a Consumer Financial Protection Agency was "non-negotiable" part of his reform package and soon after proposing a $90 billion "responsibility fee" for large banks to recoup losses in the $700 billion Troubled Asset Relief Program.

With former Federal Reserve Chairman Paul Volcker at his side, Obama repeated a familiar refrain that the new proposals would ensure that "never again will the American taxpayer be held hostage by a bank that is too big to fail."

The proposal, however, is meant to be simpler than that. Like an Alexandrian sword-stroke, dividing risky banking from depositors means "too big to fail" is patently moot. Any bank is too small to fail if it handles customer deposits. By extension, investment banks of any size -- or banks that own hedge funds or private equity firms -- will have to go it on their own from now on, provided the proposals find the necessary votes in Congress.

"The key issue is that institutions that are getting a backstop from the taxpayer shouldn't be able to make a profit off their own investing," said Austan Goolsbee, an economist who represents the White House on the Economic Recovery Advisory Board, which Volcker chairs.

The proposals clearly rattled stock markets with financial firms taking a pounding. Bank of America shares plummeted 6.19 percent, while JPMorgan Chase shares dropped 6.59 percent. By close, just two of 30 stocks listed on the Dow Jones industrial average -- McDonald's Corp. and Travelers Cos. Inc. -- showed gains Thursday.

Logic says markets need to sort this one out. A loss of proprietary trading at banks is not a shift in value; it just means the value will move somewhere else, to a new investment bank or to hedge funds, perhaps. Someone, surely, will pick up the slack. In the meantime, the political stacks are ramped up considerably, especially with the Massachusetts Senate seat held by the late Edward Kennedy shifting to the Republican party with the election of Scott Brown.

If it comes down to scrambling for votes, Democrats will be beating the bushes for any Republican they can find willing to take their side -- and that goes both ways, of course. In the meantime, U.S. Treasury Secretary Timothy Geithner took a stab and defining his position on the proposals.

"Just because things seem populist doesn't mean they're not the right thing to do," he said.

In international markets Friday, the Nikkei 225 index in Japan fell 2.56 percent, while the Shanghai composite index in China lost 0.96 percent. The Hang Seng index in Hong Kong lost 0.65 percent, while the Sensex in India dropped 1.12 percent.

In Australia, the S&P/ASX 200 dropped 1.59 percent.

In midday trading in Europe, the FTSE 200 in Britain fell 1.17 percent, while the DAX 30 in Germany dropped 1.04 percent. The CAC 40 in France slipped 0.98 percent, while the pan-European DJ Stoxx 50 dropped 1.52 percent.

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