Obama's Bank Rhetoric Misses the Mark
The last of those assertions is the easiest to start with, which is that banks haven't repaid their bailout funds. Even Citigroup (C), which was a laggard in repaying its assistance, has now progressed far enough to repay TARP funds and have the U.S. Treasury start divesting its equity stake in the firm. Unless the White House is willing to say that banks are also liable for counterparty payments made through AIG (AIG), any losses taken by the Fed for lending against low-quality collateral, and the Fed's zero interest rate policy (which effectively lowers bank expenses by taking from savers) -- in other words, actions taken that have no explicit cost to banks -- it's difficult to see a logical way to claim the banks targeted by the reform effort still owe the government money.
To claim that the banks making record profits are the same ones that aren't extending credit to Middle America further confuses the situation, and is analogous to blaming investment banks for the dearth of IPOs for technology companies without revenues in 2002. Some large retail banks, like Citi and Bank of America (BAC), lost money in the last quarter and are still working toward regaining operational traction. Others, like J.P. Morgan (JPM) and Wells Fargo (WFC), were profitable while seeing their outstanding loan balances decline -- but this is being done because old risks are not being viewed favorably in a new light. Have we so quickly forgotten the lessons of overly generous lending to believe that more credit must be good for consumers or lenders? Of the five largest depository banks before the crisis, those that grew liabilities at the fastest rate between 2002 and 2007 (in order: Bank of America, the now-departed Wachovia, and Citigroup) suffered much greater losses more than their slower-growth peers J.P. Morgan and Wells Fargo. There's a demonstrated cost to growing bank balance sheets, and it's never recognized up front; why does the President continue to pretend credit availability is an economic panacea?
There's still much more nuanced information to be revealed here on the execution of these plans, and there's plenty of time for Congress to attempt to water down reforms. But more thought should be devoted toward explaining the necessity of the core tenets of "Limit the Scope" and "Limit the Size" than doubling down on seemingly-clever populist rhetoric.
James Cullen edits and writes at CollegeAnalysts.com. He is the vice president of the Boston College Investment Club, which owns BAC and JPM, but has no personal position in stocks mentioned here.