Farrell: Political Panic Has Seized the White House
Chief Investment Officer, Soleil Securities
It started with Julius Caesar.
Maybe it didn't start with Caesar. Lots of famous people fall out of favor. Caesar's was one of the more dramatic, with his pals cutting him down in the Roman Forum one very bad day. While it wasn't the Ides of January last week as it was the Ides of March for Caesar, it was close enough for government work to use the image to characterize the worst week in the Obama administration. First, it was repudiation of the Obama health care agenda by the Massachusetts voters. But then again, I don't know it was as much a rejection of Obama as it was a populist reaction to anybody who happened to represent the establishment. I'm sure the President doesn't see himself as "the establishment" but the voters are mad and Martha Coakley and Ted Kennedy's Senate seat, in the most consistently liberal State in the Union, were in the line of fire.
Now the President's legislative agenda is in pieces.
He had delayed this week's State of the Union address so he could highlight the health care program he hoped to have passed. It now looks like it will be difficult to get any health care program out of Congress. Senators are tripping over themselves to adopt a more populist stance to show the voters they understand their concern about 10% unemployment, economic hardship, and bank bailouts. The politics of the day spread to Time Magazine's Man of the Year Ben Bernanke's renomination. From Man of the Year to possible unemployment in a month's time is something. If there is no vote on his nomination by January 31, it is expected Bernanke will step down as Chairman and Don Kohn would be interim chief. Bernanke could stay as a Fed Governor as that post runs till 2020. The Senate majority leader, Harry Reid, reluctantly endorsed Bernanke late Friday but said it was with trepidation and only after receiving assurances from Ben that he would take additional steps to increase the flow of credit to middle class Americans. Harry -- you are the majority leader and supposed to be the President's man in the Senate. Et tu Harry?
With Ben's job up in the air, Larry Summers and Tim Geithner should be worried.
They were conspicuously sidelined by Paul Volcker when the President announced his new bank plan. Volcker has gravitas, smarts and enormous credibility. It doesn't mean he is right, but he is formidable. One of the weekend papers said the 6'7" Volcker is indeed too big to fail. But I would think Rahm Emanuel should be in the hot seat as well. It was a dramatic mistake to entrust legislation to the Democratic leaders on the Hill. By definition it could never have been the President's plan. Chief of Staff Emanuel failed miserably in trying to shepherd the health plan along. Cap and Trade is dead and financial reform is being pulled several different ways. His combative style blew it and the President should have heads roll to demonstrate he is in charge.
What the President has done is to sharpen his own populist rhetoric and zero in on the banks.
It isn't like the banks didn't ask for it with huge bonuses coming on top of the rescue plan.
But I didn't know it was prop trading that got us into the soup.
I thought it was bad loans.
And while greed and avarice in the housing market encompassed many players -- bankers, rating agencies, and homeowners who thought home prices only go up -- low interest rates played a role as well. And it all sort of started with the Community Reinvestment Act of 1977 that told the banks they had to loan to subprime. My pal Sydney Williams passed along the original text which read the act was designed to "Encourage commercial banks and savings and loan associations to meet the needs of all borrowers in all segments of their communities, including low income and moderate income neighborhoods." Now Barney Frank, who famously said he was willing to roll the dice with Fannie and Freddie, wonders if they shouldn't be shut down. But it doesn't matter as the bankers make such wonderful targets.
The President's proposals show that political panic has seized the White House.
The President's suggested solutions might, and it's a might, make for good politics. But, said Jason Zweig in Saturday's Wall Street Journal, "good politics makes bad laws." The primary aim of the regulation should be to allows banks to fail without putting the rest of the system at risk. The plan put forth does not do that. Its aim is to punish investment bankers by taking away a source of profit. Commercial bankers, however, have forever shown remarkable ingenuity in discovering new ways to lose money and it always revolves around finding a way to make bad loans. You can't legislate morality and you can't impose good judgment on someone else.
The "Volcker" rule might prove to show him to be St. Paul but there is an equal chance he will be Darth Volcker. His plan was put forward a year ago and was only reconsidered when the panic hit. Something new was needed so they turned to the man exiled to Siberia for the last year. Despite never working in the private sector Geithner is considered a Wall Streeter. So is Bernanke even though he is a life time academic. Volcker is a deservedly revered figure. But the Financial Times appropriately said, "Distinguishing between risk-taking on a bank's own account and risk-taking in the course of providing services such as market-making, securitization and customized derivatives to clients is much easier to do rhetorically than in practice. Any serious crackdown risks...driving activity overseas." The article went on to say "There is a clear lack of the complexities of global finance" in the Administration (italics are mine).
So here we are with the Volcker rule and whatever that proves to be, a White House in disarray with the State of the Union speech Thursday, a Fed meeting this weeks with doubts about Ben's status, Geithner's neck in the noose (and Emanuel's should be as well -- but probably isn't), Summers being marginalized by the big guy, China tightening, Greece with no clue, and everybody's finger on the trigger. Sounds like a correction to me.
Program Note: I'll be doing a stock-picking segment on CNBC Monday January 25 at about 10.30 Eastern time with my good friend Michael Farr of Farr Miller. Tune in and start the week with us.
Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.