Invoking the name of Saint Paul of Volcker is not a bad ploy if you want to get attention. But what the President said could be called the Volcker plan is not getting a good reception on Wall Street. The proposal says banks cannot own, invest, or sponsor hedge funds or private equity funds for its own account. It also proposes a limit on the size of a banks activities. But at the moment there is no fact sheet drifting around and the proposal raises far more questions than it answers.
The one question that does not need to be asked is was the motivation behind Thursday's announcement political. Having been drubbed in Massachusetts, the Administration seems, to me at least, to have rushed out a measure of Wall Street retribution without thinking it through. Imagine a bunch of politicians doing that? Maybe Wall Street deserves everything that can be levied against it, but the angry tone of the President and the vague open-ended implications of the announcement appear to be a declaration of class war. That is never good. The recent announcement of a 15 basis point fee on certain deposits to raise some $90 to $100 billion dollars as payback for bailing out the system plays well to the electorate. But it will take between $1 and $2 trillion in potential lending out of the flow.
The questions abound.
Does this need legislation or can it all be done with existing regulatory authority? And what exactly is going to be done? Can a bank engage in market making activities only for customers? But what if those customers are other banks? Aren't both engaged in proprietary trading? Can a non bank borrow from a bank to leverage its trading book? Is that a prohibited loan? If a bank positions a trade for a customer and doesn't immediately find the other side, is that ok? The implication is that every trade will have to be matched and, if so, liquidity will be very limited.
Maybe the banks can spin out their commercial side and create two entities. How do you do that with operations in nearly every country in the world. If Goldman wanted out of its bank charter how does that process go. My partner, Carole Berger, who follows the bigger banks doesn't think such a reversal has ever been done. So maybe Goldman goes private. What a mess.
Imagine you're the head of a foreign bank right now. You would have to be salivating at the brain drain that will occur at your US counterparts if this thing goes through in its worst imaginable form. Money will find a way and capital goes to where it is best treated. To think this benefits the US is naïve. It could be called the Foreign Bank Enrichment Act. Barney Frank said in the mid afternoon that legislation would take three to five years to be enacted and who knows, by then there could be a new cast of characters in Washington.
Back on the very boring home front, The Philadelphia Manufacturing Index was reported at 15.2, a touch below expectations. It is, however, the sixth month in a row of a positive reading. New orders and shipments slowed very slightly. Inventories were still depressed, but the rate of decline slowed. The employment sub-index was up for the second month in a row which is welcome news.
The Index of Leading Indicators were up 1.1% which is seemingly a strong reading. But half the strength comes from better jobless claims and strength in building permits. The better jobless claims we saw in December, though, were apparently due to "administrative error" and life was not as good as we had been thinking.
As to the market, we have not had a 10% correction since the rally began last March. We have had a couple of 6% setbacks. There is a lot of cash looking for a home which might limit the downside if it gets put to work. But the latest news out of Washington is troublesome and bank profitability could be threatened. And maybe the hoped for earnings growth won't be there. And maybe we are just due for a setback to keep us honest.
Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.