FRIDAY JANUARY 22, 2010

Do these guys talk to each other?

Just after an election that warned of the public's concern for government intrusion, President Obama announced his plan to restrict proprietary trading and hedge funds/private operations at banks.  I guess the Financial Crisis Responsibility "Fee" (don't call it a tax) wasn't enough.  The President stated that these new rules will allow banks to focus on "serving their customers."  I guess the pension plans, endowments and other large investors who utilize these investment vehicles don't qualify as "customers."  Importantly, proprietary trading and hedge funds had nothing to do with the current crisis.  The President believes that his proposal will reduce risk and prevent the next crisis.  He wants the banks to focus on lending. Gee, isn't commercial and residential lending, i.e. mortgage lending, the epicenter of this crisis?  Indeed, Mr. Obama's Treasury Secretary, Timothy Geithner, has stated just that in more than one Congressional testimony, stating the crisis was largely caused by "classic extensions of credit." Can Mr. Geithner support a proposal that does not addresses his self-identified cause of the crisis?  Do these guys even talk to each other?

Over on the hill, Congressman Barney Frank quickly came out to state he would only support the proposal if it occurred over a three to five year period.  He is right.  The last time the government created an immediate, mandatory divestiture of investment, it created the S&L crisis.  Mr. Frank appeared to know very few details of the plan, and rightfully so.  There are no details.  Maybe someone in the White House can give Mr. Frank a call?

Meanwhile, down the street at the Federal Reserve, Chairman Bernanke continues to maintain that the Fed's easy money policies had nothing to do with fueling the speculative real estate run.  And the easy money continues to flow.  The Fed's 0% rate policy, along with the White House's record spending binge, has created one of the steepest yield curves in history.  This has helped the bank generate "obscene" profits and the vilified bonuses that come with it.  The taxpayer is in fact subsidizing the bank's proprietary trading desks!  Wait, I thought they were bad.   Perhaps Mr. Bernanke and President Obama can just say no and change their policies?

Finally, across the river, Fannie Mae and Freddie Mac continue to create massive taxpayer losses.  In the proverbial dark of night for media cycles, on Christmas Eve, the government announced it would remove the $400 billion cap on support for the two dysfunctional twins.  This is on top of the $111 million already lost!.  To put this in perspective, the Financial Crisis Responsibility "Fee" (don't call it a tax) was established to recoup from banks the $120 billion of TARP money lost by the auto industry!  Fannie and Freddie are four times as bad, and getting worse by the minute.  Yet, these financial disasters don't even warrant a mention in the President's proposal.

There is no doubt that financial reform is needed.  Reforms addressing areas such as off-balance sheet accounting, mark-to-market accounting, derivative securities, lending standards, bond ratings criteria, leverage restrictions and capital requirements would all help manage systematic risk and help prevent another crisis.  The President's proposal addresses none of these.  Hence the market sell-off.  The President's proposal appears to be a gratuitous, punitive, anti market attack on the profitability of banks.  Silly me, I thought profitable banks were a good thing.  They sure beat failing banks!  The President seems to want banks that are profitable, but not "obscenely" profitable, just profitable enough so they can lend money, but not so profitable that they pay out bonuses.  Perhaps we can get a new regulator, we can it Goldilocks, and it can tell us when profitability is "just right."  And then we can add it to the list of people in Washington who don't talk to each other!

POSTED AT 1899-12-30 11:29:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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