Obama and Business: You Always Hurt the One You Love

by Steven M. Cohen  •  Mar 24, 2009 at 2:43 pm

http://www.buyselljump.com/2009/03/obama-and-business-you-always-hurt-the-one-you

It will be interesting to see how the administration woos back the significant portion of the financial community that it has been beating on for the past few months. The very object of much of its populist vilification, the administration hopes, will enthusiastically agree to participate in Treasury Secretary Timothy Geithner's latest iteration of a plan to rid banks of the "toxic" assets that presumably are an obstacle to renewed lending. The problem is that once the "outrage" populist genie is out of the bottle, it is very difficult to get him back in. Sort of like trying to get the toothpaste back in the tube. Or unringing a bell.

But first, a market that rocketed nearly 500 points, or about 7% yesterday, deserves a midweek comment. This space does not want to develop a reputation for all gloom, all the time. A major market move is always good news—even if some pundits predictably characterize it as a "bear market rally" or a "dead cat bounce." It's best to reserve decision on the real significance of yesterday's move until more time passes.

Some of the most meaningful market moves come with no warning, and occasionally with no discernible reason. Those are usually the best kind because they reflect latent positive factors that may not be immediately obvious but often suggest improving economic conditions, perhaps the early signs of a recovery. The rallies that have an easily identifiable catalyst are often the ones that don't stick, but it's not always the case.

Yesterday's rally is in the second category because it was ignited principally by the Fed's unveiling of its bank plan blueprint, which is not necessarily to say that there won't be some follow-through. Ironically, Geithner's false start in February—when his testimony before Congress lacked any detail in the plan—probably helped him this time around. There was palpable relief that the plan's description finally contained a lot more information than the earlier version. You could almost say that it was a "relief" rally, relief that Geithner did not lay the same egg he did the first time around. Had he similarly bombed yesterday, the market might have lost 500 points instead.

But the devil still is in the details. Geithner did not explain why the private side of the partnership between the government and the financial community would be in such a hurry to participate. After the flogging that many of their brethren have taken, both from Congress as well as the administration, even the lure of potential windfall profits might not be enough to convince financial types to subject themselves to such a degree of public condemnation. And the banks themselves may be reluctant to part with many of these assets, particularly those that are especially difficult to price. If these hedge funds really want them, bankers might think, then by definition we are letting them go too cheaply. Best to hang on a while to get a better price.

Speaking of the Fed, on Sunday, March 22, the New York Times front page featured two stories that were not apparently related but together make an important point about the government's effort to exert control in new ways. The first piece dealt with the effort underway to create significant governmental oversight over executive pay for banks and financial firms. It does not take much of a stretch to assume that this oversight would then extend to many other areas of private industry, starting with companies that have accepted any form of federal aid, and, once down that slippery slope, on to companies where someone in government simply "felt" that executives were making too much money. The story also related how even before he became Treasury Secretary, Geithner has been seeking "broader authority for the government to resolve problems at financial institutions not under bank regulators' supervision." Presumably this would include hedge funds, where the Federal Reserve would add a new supervisory role in addition to that of the SEC. It's unclear, however, whether the Fed needs yet more roles in addition to the unprecedented ones it has taken on during this crisis, especially in its present skeleton-crew state. At any rate, the clear message heralds a whole new level of government supervision, oversight, and, inevitably, meddling.

The government's effectiveness in supervising heretofore private sector issues called attention to the story immediately below. Titled "Some Rich Districts Get Richer As Aid Is Rushed to Schools," it told the tale of two neighboring public school districts on either side of the Utah/Wyoming border. The Utah system was described as "threadbare," struggling mightily with spending cuts and staff reductions forced on it by a shrinking budget. Its Wyoming counterpart is relatively wealthy, featuring a new elementary school and a new Apple laptop for every child. Yet, under the Obama administration's education stimulus package, the wealthier school district will receive $400 more per child than the needier one. The administrator running the Wyoming district describes the money as a "windfall" and goes on to say that his schools don't really need the extra money.

And that is how the two stories are related: The federal government is notoriously inefficient when it comes to distributing resources, and it now seeks to exert significant new controls over vast swaths of private industry, which has a much better history, one driven by market forces, of managing capital and people. It also aims to increase spending exponentially, blowing out the deficit to epic proportions, and to control where and to whom the money goes, favoring some industries and leaving out others. A government that is so bound by regulations and formulas that it cannot distribute funds to school districts based on need—but instead gets it backwards—is not likely to bring much improvement to the private sector, and instead will further cement its reputation as hugely wasteful and inefficient.

But managing numbers has never been the government's forte, and this administration is not likely to improve that record. Just last week, the Congressional Budget Office issued a report concluding that the administration's long-term deficit projections were off to the tune of several trillion dollars. Yet even in the face of numbers that only the Obama administration thinks make sense, a stalwart Christina Romer, head of the White House Council of Economic Advisers, said she was "incredibly confident" of an economic rebound in the U.S. this year. Incredible, indeed.

Amidst all of these developments, an important political milestone should not be overlooked. New York State AG Andrew Cuomo has officially kicked off his run for governor with a $50 million bonus rebate from some of the folks at AIG! The role of the New York Aspiring Governor has proven to be an expensive one. Cuomo's predecessor, the philandering and fun-loving Eliot Spitzer, may have helped run up a tab that could eventually cost U.S. taxpayers hundreds of millions of dollars as a result of his prosecution—really persecution—of former AIG CEO Hank Greenberg. Many industry observers believe that Greenberg would not have permitted AIG to embark in the direction that eventually proved its downfall—except he wasn't around precisely when he was needed, courtesy of Mr. Spitzer, who hounded him out of the company while extracting a multi-billion dollar "fine" out of the shareholders' pockets.

Spitzer can now be seen regularly on various news shows wagging a finger at "greedy" Wall Street executives.

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