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Wall Street Under Washington’s Thumb

Forget Wall Street, the new center of American capital lies just north of Virginia. And investors are growing ever anxious as they find themselves under Washington's thumb.

Although the issues are complex, fundamentally lawmakers are grappling with two things– 1) how to use the rest of the TARP money and 2) how to stimulate the economy.


It appears before the President does anything to further help banks, he wants to address the issue of CEO pay. You may remember last week he blasted bank executives for granting themselves huge bonuses in this environment. "That is the height of irresponsibility. It is shameful," Obama said.

Once there’s some kind of compensation restriction in place for banks that access TARP money, it’s widely believed he’s looking to implement a plan to soak up bad assets and shore up banks.

The question is how?

A source familiar with the administration's thinking says Obama is considering the creation of a "bad bank”, government insurance on troubled assets, and more capital injections.

The Fast Money traders are cautious about the success of the second traunch of the TARP; they worry that banks won’t be transparent with the funds. MIT’s Simon Johnson concurs. He wants to see more disclosure, “it can be disclosed to the public or behind closed doors,” he says. But no matter how they do it, the plan needs to be transparent.

In fact Johnson says that third world nations are currently held to high standards of disclosure by the IMF than the Treasury demands of American banks using TARP funds.

The Stimulus

In an effort to stimulate the economy Congress is currently considering a plan that involves both tax cuts and massive public works projects, on the order of FDR’s “New Deal” of the 1930’s. The public works part of the plan puts money into education, infrastructure and health care. The total cost of the stimulus could reach $1 trillion.

Although the plan has passed the House it’s currently being debated in the Senate. Republican Minority Leader Mitch McConnell says the nearly $900 billion stimulus should be cut.

MIT’s Simon Johnson also has some concerns about the stimulus but cuts are the last thing he’d advocate. Following is what he says could go wrong:

1) the government probably can’t spend enough to counter-balance the cut in private spending
2) it could lead to rampant inflation
3) there’s no telling how trading partners such as Europe will react
4) it doesn’t address a dramatic slowdown in emerging markets

Final details of both the second half of the TARP and the stimulus are expected to come together by the middle of the month. We’ll be watching.

Read More

> Five Things That Could Go Wrong With Obama’s Stimulus

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Trader disclosure: On Feb. 2nd, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (AAPL), (BAC), (EEM), (FXI); Macke Owns (DIS), (MS), (SDS), (MCD); Finerman's Firm Owns (DNA) & (DNA) Call Spread; Finerman's Firm Owns (MSFT), (XBI), (IBB); Finerman's Firm Is Short (IYR), (IJR), (IWM), (MDY), (SPY), (USO); Najarian Owns (AMGN) Call Spread; Najarian Owns (BMY) Calls; Najarian Owns (DRYS) Stock & (DRYS) Puts; Najarian Owns (EEM) Call Spread; Najarian Owns (FCX) & (FCX) Short Calls; Najarian Owns (GDX) Call Spread; Najarian Owns (MSFT) & (MSFT) Short Calls; Najarian Owns (MS) & (MS) Short Calls/Put Spread; Najarian Owns (V) Call Spread with wires