Jan 21, 2010: Obama vs. Banks

The war against banks started back in October of 2009, when Bush unveiled a $700 billion bailout to financial institutions. Recently, the American public has expressed much anger at Wall Street, with bank bonuses being paid in the millions while Main Street continues to suffer. The anger stems from the belief that public money saved private firms, and these firms have not provided a return for the public (except Citigroup who paid back all their TARP), only to their already well-endowed board members. These opinions have forced President Obama into a tough situation, and today he announced a proposal to limit Propriety Trading (Prop Trading). As a result, stock markets took the biggest beating of the year. The Dow Jones and S&P 500 dropped nearly 2 per cent; the Nasdaq fell over 1 per cent. This will headline all newspapers and news broadcasts for the next day or so, but what does the limit actually mean for investors and Main Street, and why did all stocks fall, not just banks? Prop Trading is a term used in the industry to describe when a financial institution invests in any financial instrument to make profit for themselves, as opposed to trading for their customers. The firms will use their own money, not risking anybody else's, to try to profit. Prop Trading is being blamed by Obama for the disintegration of the US financial system, and he wants to put a stop to it. Others also believe that prop trading has allowed the market to rise substantially since March 2009, fueled by greed. This proposal would limit the risks firms take in the market, potentially preventing another future meltdown. I personally do not agree with this theory entirely. Firms have historically created huge profits from prop trading. Goldman Sachs [GS:NYSE] generated $45 billion in prop trading revenues last year, which will eventually go back to TARP payments, I hope. For Main Street, this should be good news because jobs will be saved and even created. These firms need traders. Banning prop trading will end that. Secondly, a large portion of the daily movement in the stock market is a result of prop trading. I could not give you a definitive number, but losing these traders could damage the market quite heavily. One website claims that high-frequency trading represents as much as 70 per cent of daily volume. Today, markets fell 2 per cent because these traders may soon be out of the market. Taking out half of the market's traders over night will clearly end the market run-up. Although I do think the market needs to correct, this is not the way it should be done. I haven't heard any regular investor complain about their account doubling in a year. But you will undoubtedly hear them complain if they lose half their wealth. Nearly 95 per cent of investors do not hedge or know how to hedge. I am concerned that the anger in Main Street is being misplaced, and preventing financial institutions to do what they have historically done is not the way to prevent another financial meltdown. Zerohedge.com (a proponent of the bill) wrote, "Undoubtedly, short-term strategies have paid off for banks. In fact, much of the profits earned by our nation’s largest financial institutions have been posted by their trading divisions." The website brings up strong points for the bill, which I highly suggest you read. But the proof is in the pudding. Financial firms are alive because of taxpayer dollars, but continue to strive because of trading. Removing trading means we will remove these profits, and the US government may never see TARP repayments again. President Obama, there are better ways to reduce risk in the market through proper channels and regulations. My job isn't to figure that out; that is yours. The American people will not be willing to bail them out a second time, which means all your work will be all for not. Good bye Recession, hello Depression?