Wall Street had a down week last week. (File)
The DJIA dropped over 550 points during the three days ended Friday, January 22, 2010. The broader S&P 500 Index was also down over 5% from its recent high reached Tuesday of last week. The financial market swoon, resulted in stocks turning in their worst performance since late February 2009, just days before the Markets hit their cycle lows March 6.
The March lows continue to be the lowest levels seen since the current recession began, and the residential mortgage and banking crisis caused stocks to crater.
The rebound that followed has been explosive, as the S&P rose 70% from the March lows.
Enter President Obama. The President gave two speeches last week that immediately were followed by selloffs in the stock market. First he announced a plan to enact banking reform which would limit the size and scope of Wall Street institutions. And on Friday, he closed the week by holding a town hall meeting at an Ohio community college where he discussed the current efforts on healthcare reform.
It was his announcement on bank reform that set the stock market rolling downhill.
“Never again will the American taxpayer be held hostage by a bank that is too big to fail”, said President Obama.
Wall Street Banks are not very popular in Main Street America right now. As major banks and brokerages took taxpayer money in a bailout of the financial system which seemed to be on the brink of collapse.
In recent months, less than a year after the bailout, many of the banks paid back the taxpayer money. And in the recent quarter, many large banks booked huge profits and paid out billions of dollars in incentive bonuses to producers and executives.
Even while this happens there are investors in Miami who own waterfront condos that they still can’t sell, and there are thousands of unemployed workers all over South Florida who can’t find jobs.
Predictably, average Americans cheered the President’s announcement on bank reform, but the specifics of the plan caused investors and analysts to question whether this bank reform represents protection from the need for future bailouts, or punishment for the bailout which already took place.
Investors who own financial stocks chose the strategy of selling first, and asking questions after, in a manner which was reminiscent of the collapse in financial stocks that took place from late 2007 through early 2009.
On Friday, he disparaged banks further as he spoke to a cheering crowd in Ohio. And stocks seemed to drop further with each ovation.
In 3 days the Financial Sector Spiders (XLF) dropped over 6.6%, far steeper than the drop in the broader markets. And individual bank stocks like JP Morgan (JPM) and Goldman Sachs (GS) dropped 13% and 11%, respectively.
The President’s announcement was seen to be aimed directly at large Wall Street firms who have earned a large amount of their profits from activities other than traditional lending and capital markets activities.
“Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit…..”, said the President.
This attempt to scale back bank operations raised questions as many investors and market experts noted that the recent banking crisis wasn’t caused by trading activity or private equity, but was a result of lax underwriting standards and extraordinary amounts of leverage that banks took in performing their traditional function of lending money for residential mortgages.
Certainly, the weakness in the South Florida real estate market continues, and this illustrates the fact that in this environment, the President certainly can’t lose political points among average American voters by attacking the banks.
But investors and the financial community are watching their stocks plummet again, even though a systemic collapse has been avoided.
President Obama may not recognize the slippery slope on which he is standing. He is continuing to give speeches which deride Wall Street institutions, just as he did when he entered the White House. But, back in January, he comforted markets by coming on TV and denouncing financial firms which caused the crisis, and by promising to reign in the abuse of risk on Wall Street.
But, Now the stock market is far higher than its March lows, which is something politicians usually stop to take credit for. Instead, President Obama is stirring up ill feelings when it might be better, for Wall Street and for Main Street, if he just took a victory lap and promised to remain diligently on the job.
It is one thing to come into office while a crisis exists and blame the fall in stocks on your predecessor. It’s quite another to be blamed for causing the reversal of a major stock market advance.
If the selling in stocks continues, it might not only be Wall Street participants, but also President Obama’s own staff and advisors who are yelling, “Mr. President, please shut up.”