When President Obama summoned the heads of the nations 12-largest financial institutions 3 neglected to show up in person and 2 others used the day of the meeting to announce that they would be paying back the money they owed the government. Apparently bank executives were not very pleased with the President's 'fat cat' line, and they intended to leave Obama in the position of the fat girl pleading for a prom date.
Rather than calling bankers names and concocting PR stunts, Mr. Obama may have been well served to learn from the AIG experience. To recap: the reason why AIG's counterparties would not accept anything less than par (the one exception was UBS's 2-cent haircut suggestion) was because Timothy Geithner's Fed had already bailed AIG out. Right or wrong, banks are the business of making money, not flushing it down the toilet. Apparently Mr. Geithner forgot this:
"After FRBNY decided to...buy the underlying CDOs, it attempted to obtain concessions from AIGFP's counterparties. FRBNY developed taking points for its staff for these negotiations. The talking points stressed that participation in concession negotiations with FRBNY was voluntary and asked the counterparties to consider the cost of the considerable direct and indirect benefits that the counterparties had derived from the Federal Reserve's support of AIG." SIGTARP. November 17, 2009
AIG's counterparties did, in fact, consider the 'benefits' of the Fed's 'support'. That is why they got paid in full.
Back to Obama, that he is trying to rekindle the AIG experience by plucking the sentimental strings of banking executives is, quite frankly, pathetic. Consider the ridiculous 'talking points' President Obama and Lawrence Summers recently worked out:
"America's banks received extraordinary assistance from American taxpayers to rebuild their industry -- and now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy." Obama. Dec 14, 2009
"The country did incredible things for the banking industry. Those things had to be done to save the economy, but no major bank would be intact, in a position to pay bonuses, if that extraordinary support had not been provided. The bankers need to recognize that. They need to recognize that they've got obligations to the country after all that's been done for them." Summers. Dec 13, 2009
Say what you want about the fat cat bankers (some of which did not want to bailed out in the first place), but the only thing they are, and should be committed to is the fiduciary obligations they have to shareholders. As for the average taxpayer (that didn't want to bail out the banks in the first place), in most cases their investment has produced returns.
In short, that Mr. Obama attempted to turn back time and attach strings to the taxpayer's investment in the banks was a sign of desperation. That his actions sparked a more unified effort by banks to rid themselves of TARP also suggests a major miscalculation.
Obama: "The only ones that are going to be paying out these fat bonuses are the ones that have now paid back that TARP money..."
It took a day following this line for Wells Fargo and Citigroup to figure out a way to pay back TARP.
A Dazed Obama Bounces Off The Ropes?
Obama began the year attacking bank executive compensation and talking about the need for a massive regulatory overhaul. When the banks owed money to taxpayers and the financial system was in disarray he had a great deal of leverage on these fronts. Now that the markets have stabilized and banks are paying back TARP Obama has reluctantly backpedaled, saying "my interest isn't...[to] dictate to them or micromanage their compensation practices". As for the regulatory efforts, Obama's goal of regulating OTC derivatives participants without exception has already been eviscerated from the House Bill (H.R. 4173) and it is likely that the Senate's version will come under even further attack.
Another pressing regulatory theme, at least according to Obama, is getting the "Consumer Financial Protection Agency" to come to life.
"And I made very clear that I have no intention of letting their lobbyists thwart reforms necessary to protect the American people. If they wish to fight common-sense consumer protections, that's a fight I'm more than willing to have."
Just as bank bosses do not voluntarily eat loses, they also do not voluntarily endorse any regulation that could curtail their profit making powers. Yes Obama, the lobbyists wish to fight!
"Just last week, Republican leaders in the House summoned more than 100 key lobbyists for the financial industry to a "pep rally," and urged them to redouble their efforts to block meaningful financial reform. Not that they needed the encouragement. These industry lobbyists have already spent more than $300 million on lobbying the debate this year." Obama. December 12, 2009
"...by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework." Obama. March 27, 2008
Conclusion: Ding, Ding!
President Obama wants more regulatory eyeballs on the increasingly precarious financial marketplace, but he is unwilling to take up the challenge of actually making the markets any less precarious. To be sure, Mr. Obama has made absolutely no effort to breakup the banks, to curtail the Fed's unmitigated powers, or to sort out the ongoing and growing mess that is Freddie and Fannie. Moreover, Obama's jab against the rating agencies - one of the major contributors to the crisis - is not even tantamount to a slap on the wrist. Instead Obama seems content to leave the systemically breakable financial marketplace alone so long as more police officers start walking the streets.
But all may not be lost. Along with Ron Paul's noteworthy Fed audit plan, two bills are now in the works to reinstate the Glass-Steagall Act. The restoration of Glass-Steagall or any regulation that breaks up the banks would be a game changing issue that makes anything Obama is proposing almost inconsequential by comparison. Ironically, the threat of breaking up the banks (something Obama has been unwilling to support) may be what gives some much needed leverage back to the 'fat girl'...
With current Treasury Secretary Geithner adamant that repealing Glass-Steagall did not cause the crisis and former Treasury Secretary Lawrence Summers one of the architects behind repealing the act, it will be interesting to see how Obama proceeds going forward. At risk irritating the already irritated bank executives, will Mr. Obama finally start to follow the advice of Paul Volcker and throw his hat into the 'break them up!' ring? Or will he hold more meetings with bank executives and remind them that others wish to do them harm but that he can help so long as they support his plans? Whatever the outcome, it is clear that a major "fight" is brewing: The lobbyists are coming to town, they are checking their hit-list twice, and President Obama must soon decide whether to play it naughty or nice.