Trust Wall Street? Obama edition.
Posted on 25. Apr, 2010 by scott in economic daydreaming
As promised here is my assessment of the Obama plan for Wall Street reform.
Read this with the clear knowledge that President Obama has proven he is NOT a free market capitalist in the Adam Smith mold. He claims to be, but the last 16 months have given sufficient proof that he is a genuine dyed-in-the-wool left-wing democrat socialist (not that this ideology is bad since it works in China . . . just that it is generally bad for the world’s greatest and most powerful economy).
I am going to give each of the points he enumerated in his recent speech a letter grade. Just like school. An ‘A’ is really good, a ‘B’ is pretty good, a ‘C’ is politically and economically tiresome with no new news, a ‘D’ is bad stuff for you and I as individual investors, and an ‘F’ is bad news for everybody but the big-wigs on Wall Street (already the highest paid–read overpaid–executives on the Planet Earth).
First: Obama is going to ‘make certain taxpayers never again are on the hook to bailout Wall Street Firms that are Too Big To Fail.’ To do this he is going to put a limit on the size of risks that financial firms can take.
Grade– ‘C’ maybe ‘C-’. How does he intend to accomplish this task? An army of accountants in the hundreds of thousands to monitor every transaction above a certain limit? Impossible. New rules that simply say what he said? Impossible. Wall Street is overloaded with entrepreneurial and greedy financial wizards right out of Business Schools that give prestigious MBAs. They can, and will, find a way around any new rules including breaking up trades so that the risk appears limited but really isn’t. Bottom line: fancy talk that makes points with taxpayers (the 50% of the population that do pay taxes and do invest) but Obama will NOT be able to deliver.
Second: New transparency that will take derivatives out of the ‘filthy cellar’ of Wall Street’s underground and make them legitimate financial instruments that are well-defined and traded on an exchange so that everyone can see and understand what the risks and benefits are. Whew, that sentence took some effort!
Grade: ‘B.’ It makes sense to get all derivatives out in the open and trade them on an exchange. Doing this will require that those who create and sell such ’stuff’ will have to meet SEC disclosure regulations ( improved for this purpose). Then, if you are so inclined, as an investor, you will be able to look up the ugly (or pretty) details of all derivatives and judge for yourself, though I caution you these could run into the hundreds of pages. There will also be a market for derivatives and you had better believe they will trade a lot. This means that skilled and savvy financial wizards will study them carefully before they commit their own, or their client’s, money — because if they don’t they could be liable for losses. I don’t know how this will work but the infrastructure to do so is in place and won’t require a lot of time and money. Good for you President Obama, but, isn’t this one kind of obvious given the current recession? And does he really think individual investors will read all that crap?
Third: Create ‘The strongest consumer protection ever.’ This is really nothing more than a political ploy to appeal to voters. It doesn’t do anything more than #2 above does. But, it does give the President a talking point to prove he is an efficient and versed user of the ‘Telepromter.’
Grade: ‘D’. There isn’t anything here that will offer new meat to investors. Better product? Better disclosure? Better Choices? All encompassed in #2. Make your talks short and to the point Mr. President. Stop gloating at your command of financialese.
Fourth: Give shareholders more power. ’Say on Pay and more say on the election of Directors.’ Attaboy. This was always intended in public corporations but has been dreadfully abused and destroyed by modern management. Shareholders provided the capital and they should have a determinative say on compensation at the highest levels. Directors should also be elected by the shareholders and not as a result of ‘friendly’ votes by Mutual Funds or Retirement Funds with majority control and ‘interlocking directorships’ (where directors serve . . . with handsome compensation . . . on boards of mutual funds and also on the board of corporations that the mutual fund invests in — just one of many ways that directors and CEO’s pad there own pockets. This is a move that could really level the field for what Obama calls ‘consumers’ or individual investors like you and me. It means those proxy statements that come in the mail once a year will be meaningful and give each of us a say.
Grade: ‘A’ – if the president can pull it off. Remember that these same mutual funds and corporate boards are the ones who contribute huge amounts to election campaigns (another area for major reform) and won’t want to kill the golden goose. I am a long time investor and I ‘KNOW’ that certain CEO’s and many Directors are paid far too much. There is nothing really magic about running a huge public company (I have consulted to a few in my days). Good leadership is not as rare as many people believe and decision making is not as difficult as many others tell shareholders. There has to be a limit and Boards have to represent the shareholders rather than the CEO’s and themselves. This can be done but it is going to take some real ‘cajones’ to push through politically. Does the President have what it takes? The health care reform bill makes me think he might. We can only hope.
Overall, reform of Wall Street is needed. No doubt. I just hope lobbyists and ‘endentured servant’ politicians can pull it off.
Honors and Recognitions
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