finance

November 6, 2011 Washington Post article by Zach Goldfarb: “During Obama’s tenure, Wall Street has roared back, even as the broader economy has struggled. The largest banks are larger than they were when Obama took office and are nearing the level of profits they were making before the depths of the financial crisis in 2008, according to government data. Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 2 1/2 years of the Obama administration than they did during the eight years of the George W.

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When JP Morgan announced its $2 billion trading loss a few weeks back, a handful of smart conservatives saw an opportunity for Romney to get to Obama’s left: Call for an end to too-big-to-fail. As AEI’s James Pethokoukis put it: In one fell swoop, Romney would undercut the charge that he’s a creature of Wall Street and the financial superelite. And given how many hedge fund managers and other investment pros dislike the mega-banks, Romney probably wouldn’t even take a fundraising hit.

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New York Times columnist David Brooks, defending Mitt Romney against a new Romney-bashing ad from President Obama’s re-election campaign, describes private equity as a “reform movement”: "Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations. The process was brutal and involved streamlining and layoffs.

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So let me get this straight. JP Morgan loses more $2 billion, reportedly thanks to the recklessness of a trader nicknamed “the London Whale” and “Lord Voldemort,” and all Morgan CEO Jamie Dimon has to say is “it was bad strategy, executed poorly”? Well, no, that isn’t precisely correct. Dimon also says he remains only “barely” a Democrat because the Democrats want excessive regulations, including the so-called “Volcker Rule” banning some types of proprietary trading.

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Any honest discussion of Obama and populism arrives pretty quickly at two conclusions. The first is that Obama has become a more populist politician than anyone detected early in his presidency. The second is that, even so, there’s probably never been a less populist president who’s stirred up so much vitriol on Wall Street.   The obvious question is why, and this forthcoming Times magazine piece on Obama's fundraising hints at the best explanation yet:  For the next hour, the [Wall Street] donors relayed to Messina what their friends had been saying.

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Thomas Philippon, a New York University economist, has reached the remarkable conclusion that despite having gobbled up the American economy—total compensation in the financial sector (profits, wages, and bonuses) now represents an unprecedented 9 percent of GDP—Wall Street is no more efficient at “transferring funds from savings to borrowers” than it was in 1910, when finance’s share of the GDP was about half what it is today.

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The Big Split

In May 2007, when Barack Obama was but an upstart challenger of Hillary Clinton, he attended a gathering of several dozen hedge fund managers hosted by Goldman Sachs at the Museum of Modern Art in New York. It was not a fund-raiser, just a chance for Obama to introduce himself to the investment wizards who had helped turn the hedge fund sector into the most lucrative and alluring corner of the financial universe. And the first question for Obama was as blunt as one would expect from this crowd.

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Speaking of the free passes Romney may be getting—and, for that matter, of financial engineering—there’s another slightly-dodgy Romney formulation that hasn’t gotten much pushback so far: the distinction between “venture capital” and “private equity.” Venture capitalists typically provide money to very young firms to help them get off the ground in exchange for an ownership stake. Private equity firms typically provide money to more established firms, often those that have run into problems, also in exchange for an ownership stake.

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Any serious program for Wall Street reform should start with two words: “term out.” “Terming out” is a financial term of art, but its meaning is easily grasped. It simply means funding your business with long-term financing instead of short-term IOUs. To a far greater extent than is commonly understood, our financial sector funds its operations with extremely short-term borrowings. These IOUs must be paid back in a day, a week, or a month. By contrast, termed-out financial firms shun borrowings that come due in less than a year.

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On Monday, a single, ringing court decision gave hope that Wall Street will finally be held to account for its role in causing the financial crisis. Federal District Court Judge Jed Rakoff’s opinion may soon force the SEC, the federal government’s investment regulator, to take big banks to court, rather than continuing to come to terms with them in out-of-court settlements.

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