Wall Street "bet against Obama and now they're paying the price"

David Weidner (MarketWatch):

The traders on Wall Street rarely miss an opportunity, but they did last year, and now the industry is about to pay a price.

Here's how: Back in March, newly minted President Barack Obama, in only his second live prime-time address from the White House, warned Wall Street not to block new regulations.

"Bankers and executives on Wall Street need to realize that enriching themselves on the taxpayer's dime is inexcusable, that the days of outsize rewards and reckless speculation that puts us all at risk have to be over," Obama said.

During the next five months he repeated the message.

Finally, fearing the memo wasn't getting through, he went to Wall Street on Sept. 14 and delivered this admonition:

"There are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. They do so not just at their own peril, but at our nation's."

By now, it's clear that Wall Street heard the message, but wasn't heeding it. Risk-taking went unabated for much of the year. Now, Wall Street is in the process of paying out $145 billion in bonuses, 18% more than was paid in 2008 and slightly more than was doled out in the record bonus year of 2007. See WSJ report on Wall Street bonuses.

Whether leaders such as Lloyd Blankfein at Goldman Sachs Group Inc. (NYSE:GS) , Jamie Dimon at J.P. Morgan (NYSE:JPM) and Vikram Pandit at Citigroup Inc. (NYSE:C) thought the president was bluffing, or that he wouldn't have the support to push through reforms, doesn't matter.

They bet against Obama and now they're paying the price.

Last week the president unveiled a sweeping $90 billion bank tax that would be levied against the 50 biggest banks in the U.S. market. As the new tax was announced, five bank CEOs were being questioned about practices that led to the financial crisis before a new panel, the Financial Inquiry Commission, which is modeled after the board that brought sweeping reforms to Wall Street in the Great Depression.
Obama to Wall Street: Embrace Bank Fees

President Obama comments on Wall Street opposition to new bank fees. Video courtesy of Fox News.

The twin-pronged attack on the industry has put it on the defensive. The recovery of the financial industry as evidenced in big profits announced Friday by J.P. Morgan, show the deepening divide between Main Street's fortunes -- double-digit unemployment and mortgage defaults -- and those on Wall Street. Read more about J.P. Morgan's earnings.

Greed on Wall Street is showing itself to be an uncontrollable urge. Had Wall Street shown some restraint, it likely would have avoided the clampdown coming its way and bought itself time until the populist anger blew over.
Showing restraint

If bonuses had been halved and profits sacrificed for the sake of increased lending or more forgiving terms, big banks and brokerages would have a stronger case if Obama and lawmakers chose to come after them.

Some suggest Wall Street has given in. There's more stock compensation. J.P. Morgan said it set aside just $549 million for investment bankers, down 80% from the third quarter. The bank's bonus pool fell below analysts estimates. And by pre-crisis standards, the industry is paying out less -- from 5% to 10% -- of overall revenues.

The problem, of course, is that 5% to 10% of gazillion dollars is still a king's ransom. In a nation where the median income is somewhere around $50,000, an average bonus of $149,192 isn't going to make anyone feel better -- it's going to make them mad. That amount is still a Wall Street record.

Big banks and brokerages still have some cards to play. They've spent $3.8 billion during the last decade, including $64 million last year, lobbying. In the current election cycle, banks and brokerages have put up $14 million in contributions so far, an amount that ranks only behind the legal and healthcare industries, according to the Federal Election Commission.

The influence that money buys could present a stumbling block to the bank tax and any reforms that may be proposed. But it's a big bet, given the outrage over the $1.2 trillion in support the government has given banks and the markets.

The industry could also be hoping that reform and efforts to curb pay collapse upon themselves. There's no guarantee the Financial Inquiry Commission will bring meaningful reform. And other than a pay review by the Federal Reserve, there are no hard and fast rules governing compensation.

A better bet would have been to show some restraint, if only for a year. Bonus crackdowns would be a tougher sell in an economy where more people were working, wages were rising, home price stabilizing and more credit available. Banks could have lifted bonuses in an environment where everyone was feeling better off.

For now, it looks as if Wall Street has bet wrong -- and it could cost them billions.