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David Callaway
Jan. 14, 2010, 12:01 a.m. EST · Recommend (1) · Post:
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By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) -- When in doubt, hit them with a new tax.
That seems to be the Obama administration's answer to just about everything these days, and the financial crisis is no different.
The plan to recoup $120 billion in TARP bailout money with a new tax on banks will make for good politics, throw a bone to a public clamoring for Wall Street blood and hopefully halt the debate about whether the bailout was a waste of money. But will it be enough to wipe those smug looks off the faces of the banking chiefs who were in Washington Wednesday? Don't count on it.
The problem with trying to hit Wall Street in the wallet is that its wallet is too big. A British plan to tax banker bonuses, unveiled last month, failed miserably, as most banks just said they'd eat the taxes themselves and still pay higher bonuses. What else you got, Gordon Brown?
Reuters Lloyd Blankfein, left, chief executive of Goldman Sachs Group, testifies before the Financial Crisis Inquiry Commission in Washington Wednesday. Jamie Dimon, (2nd L), chief executive of JPMorgan Chase, John Mack, (3L), chairman of Morgan Stanley, and Brian Moynihan, (R), chief executive of Bank of America, await their turn to speak before the commission.
The Obama plan is expected to tax banks based on the size of the liabilities on their balance sheets, which in theory would cause banks to try to keep their liabilities low so they wouldn't have to pay more taxes. But banks already pay taxes, and that's never figured into their profit plans.
Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs (GS 169.07, +1.25, +0.74%) was reported to have made $100 million a day trading stocks, bonds and derivatives on almost 200 trading days in the first three quarters of last year. You think the guys and girls on the trading desk worry about the overall bank's balance sheet when they're competing to see who gets the biggest bonus? Nah.
This tax will be chewed up, spit out, carved into a half-dozen derivative contracts, sold and then shorted by the time the tax authorities even figure out how to collect it.
What Lloyd Blankfein, Jamie Dimon, John Mack and the rest of the guys sitting under the hot lights on Capitol Hill Wednesday realize is that banking cycles run at two speeds: full tilt and kaboom. Make as much money as you can while you can, then hunker down and weather the inevitable crisis and wait for the next bull run.
Dimon said as much on Wednesday, testifying that he once told his daughter the definition of a financial crisis is something that happens every few years. So the crisis happens, the banks fire a bunch of people, the market plunges and the little guy loses his job and retirement savings, while the top bankers protest to politicians that they can't be expected to predict the markets.
One of the highlights of the commission hearing was Blankfein's lame attempt to argue that Goldman thought it was selling its derivative products to sophisticated investors. Yeah, Chairman Phil Angelides shot back, pension funds representing cops.
The problem with trying to hit Wall Street in the wallet is that its wallet is too big.
The Obama team can't stop financial crises from happening any more than it can wipe out terrorism or solve global warming. But it can attack the root causes of how Wall Street gets itself in trouble every few years. The blueprint is in the history books from the Great Depression. Some of the bank chiefs, secure in their belief that they're back to business as usual, couldn't even resist hinting at it themselves on Wednesday.
Structural and regulatory reform is the only answer. Wall Street has proven in dramatic and economy-crippling fashion that it cannot police itself, and no arguments from bank leaders about hampering global growth should be allowed to obscure that fact.
The biggest banks should be broken up, divided back into trading and investment operations and deposit and loan-providing operations. Perhaps not the full return of the Glass-Steagall Act of 1933, but something pretty close. The bonus system should be regulated and so-called "clawback" rules that require bonuses to be paid back if something goes wrong should be rigorously enforced.
WSJ's Jerry Seib joins the News Hub from Washington, where he says Goldman Sachs CEO Lloyd Blankfein became a target at a hearing before the Financial Crisis Inquiry Commission.
Finally, regulators, central bankers and banking-industry leaders should combine to form national and global groups to monitor systemic risk and be prepared to pop asset bubbles when they grow too much -- at their discretion.
Nobody, from schoolchildren to multimillionaire bankers, want more rules. It's natural. But Wall Street has proven that the alternative is worse. President Barack Obama has a once-in-a-generation chance to solve this problem before the next bubble bursts. He should take it.
Meanwhile, as I write this, there are two respected financial journals on my desk. The cover of the Economist this week is headlined "Bubble Warning." The cover of Barron's, a sister publication of MarketWatch, says "Abandon Ship."
By the laws of superstition and magazine covers, the publishing of these two front pages probably means that the global asset bubble in stocks, commodities and emerging markets is only just now entering its most dramatic, explosive upside phase. I've heard some respected market strategists say we could go straight up for several more months before there's a correction, or worse.
But nobody, least of all in Washington or on Wall Street, should claim they haven't been warned.
David Callaway is editor-in-chief of MarketWatch.
- I.came.to.fight | 12:47 a.m. Today12:47 a.m. Jan. 14, 2010
Kraft Foods Inc., in its tireless effort to buy London-based Cadbury, has revealed new-found powers to impress skeptical Cadbury shareholders: Higher profits.
2:27 p.m. Jan. 13, 2010 | Comments: 1
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