Friday, January 22, 2010

As U.S. Banks Deteriorate, Obama Proposes New Regulation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

President Obama proposed placing new limits on the size and activities of big U.S. banks on January 21st. The new plan, known as the Volcker Rule, would effectively prevent banks from owning hedge funds and private equity funds and seeks to place curbs on the market share of liabilities for any given firm. It follows last weeks proposed new tax on the big banks to recoup losses from the 2008 bailout. The administration apparently hadn't informed Wall Street about the impending news. The U.S. market was caught off guard and predictably sold off sharply with the banks leading the way. The European and Asian markets sold off in sympathy.

Recent earnings on the big banks have shown that their loan portfolios are continuing to deteriorate. Fourth quarter regional bank earnings confirm that little if any improvement has taken place since the depths of the Credit Crisis. BB&T (BBT) earnings fell 36% last quarter and its provision for credit losses were $725 million versus $197 million in the fourth quarter of 2008. Huntington Bancshares (HBAN) losses on its commercial real estate portfolio were $258 million in the fourth quarter versus $169 million in the third quarter. SunTrust (STI) non-accrued loans are now $5.40 billion, down $42 million from the previous quarter, still very high and barely getting better.

While it is possible something may eventually come from the Obama proposals, investors shouldn't expect that they are a done deal.  In his signature, it's not my job approach, the president appeared to be leaving crucial details for his bank oversight plan to be hashed out by Congress - an institution that is perennially dysfunctional and which is viewed almost universally unfavorably by the American electorate (one recent poll found that only 21% of voters view congress favorably). This is how Obama handled his intended health care reform, which has turned into a giant boondoggle for the administration. Obama has also taken this tack with his proposed consumer protection agency that has gotten caught in partisan wrangling on the Hill. If Obama's intention is to just talk about something, but make sure nothing ever happens, he seems to have found the magic formula.

Obama took office right after the lowest point of the Credit Crisis. Like any new president, he had enormous political capital at that moment, but did very little with it. He was president for a year before he said in his press conference proposing new bank regulation that the banks nearly wrecked the economy by taking "huge, reckless risks in pursuit of quick profits and massive bonuses."  Unfortunately, we are still suffering from the after-effects of the Credit Crisis and this will be the case for some years to come. Mortgage defaults are still a major problem for the banks and a burgeoning commercial loan crisis is now taking place. In 2009, 140 U.S. banks went under, the largest number since the Savings & Loan Crisis. The administration's efforts to handle banking problems so far have been ineffective at best. It would be preferable if the Obama administration solved the current serious problems first rather than concentrating on some distant future situation.

Disclosure: None

NEXT: The Case Against Reappointing Ben Bernanke

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

Steve Rogers said...

may be, he's doing so because, seeing tough fight for massachusetts seat, he announced a new tax on banks last week. mostly a populist decision.

still dems lost the seat. now being on the backfoot "O" knows only the speeches aren't working anymore!

so y'day he came up with Volcker regulation on banks.

market reacted.