Busch: Change and the Pushback

As the shift of finance from Wall Street to Washington continues, there are many of the faithful that are getting nervous.

Yesterday, CNBC had an exclusive interview with Warren Buffett that encapsulated the frustration of the markets with Team Obama. Buffett has been a long time Obama supporter, has publicly advocated for his election, and has promoted Obama's policies. This is why the interview gave a fascinating glimpse into what other big names must be telling the President.

Buffett called for clarity on the policy coming out of Washington for the financial sector. Moreover, he said that the President must make that call. Buffett did believe that that US basically did all the right things to bail out the financial system in September. He also fired a salvo at Congress by saying that politicians are doing some "inappropriate" things given the current environment, including requests for allocation for pet projects. This is not just another investor worried over what is happening in DC.

Others within the Democratic party are getting nervous as well. The $410 billion spending bill that is pending in front of Congress is the subject of a mini revolt against wasteful spending and earmarks by Blue Dog fiscal conservative Democrats led by Sen. (D, NJ) Robert Menedez. Menendez was angered over a provision dealing with Cuba, but triggered others to stand up to the bill. As WaPo put it, "The Menendez rebellion was a jolt of political reality for Reid, House Speaker Nancy Pelosi (D-Calif.) and Obama, signaling that the solidarity of the stimulus debate is fading as Democratic lawmakers are starting to read the fine print of the bills they will wrestle with in the coming weeks and months, and not always liking what they see."

Why is this occurring? Look at both the stock and bond markets. First to Buffett and the financial sector, the US Treasury/FDIC stress testing program is creating tremendous uncertainty for banking shares. The test looks at how bank assets and liabilities respond to the "stress" of 10.3% unemployment, -3.3% GDP, and (drum roll please) peak to trough decline in housing prices of 47%. After undergoing this test, the FDIC is going to determine if a financial entity can survive. If not, they will be either shut down, merged, given a mandatory TARP injection with all the handcuffs, or given a clean bill of health.

3 out of 4 of these outcomes are negative and prompt investors to sell all of the 19 financial institutions being reviewed. Since the February 9th test announcement, financials are down over 18%. As an indication of what the FDIC is possibly thinking, they are seeking legislation to allow them to borrow $500 billion to shore up the fund it uses to guarantee bank deposits. Remember, they currently backstop $4.5 trillion of insured deposits at over 8,000 banks.

As far as bonds go, here's the question that needs to be asked: how can yields on US Treasury's go up when the global economy has collapsed? Simple, analysts have studied how much debt will be hitting the US market with the $787 billion stimulus plan, request for $350 billion of TARP, the Obama budget of $3.6 trillion, and the $410 billion spending bill. It's like the US is asking the bond market, can this country create a debt so big that even God can't lift it?

Then there is the Charles Krauthammerangle to this story as he explains Obama's logic on the crisis and his plans to get us out of it. "Obama has come to redeem us with his far-seeing program of universal, heavily nationalized health care; a cap-and-trade tax on energy; and a major federalization of education with universal access to college as the goal."

"But the list of causes of the collapse of the financial system does not include the absence of universal health care, let alone of computerized medical records. Nor the absence of an industry-killing cap-and-trade carbon levy. Nor the lack of college graduates. Indeed, one could perversely make the case that, if anything, the proliferation of overeducated, Gucci-wearing, smart-ass MBAs inventing ever more sophisticated and opaque mathematical models and debt instruments helped get us into this credit catastrophe."

All of these add up to questions over the direction of policy. The reason why this is happening is because the markets are voting on them with a resounding Nay. Now Buffett and members of the Democratic party are making their objections known. Let's see if the markets take some comfort from it.....


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Andrew Busch
Andrew Busch

Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him here. </</p>