Banks Shot Themslves in the Foot - Obama Proposes New Regulation

In the face of record profits and record bonuses, the banks have become the easiest target in the Nation. President Obama is going after them, knowing that it is the one issue the Republicans can't block him on. In a perverse way, the election of Senator Brown probably fueled the actions against the banks. After all, it's the one reform issue that the public will support.

Last week, when President Obama proposed his banking stupidity tax, I wrote in an article entitled Banks Asking for More Regulation:

"I predict that 2009 will be the high water mark for the finance industry in the United States. The banks overplayed their hand and now they are going to watch as the government and general public begin to slowly dismantle the profit-making system that succors them. Expect a lot of hand-wringing and talk about how regulation of the banking system is bad for everyone, but most of it will be ignored. The public is mad and has come to realize that what's good for the banks is no longer good for Main Street."

President Obama nearly echoed this sentiment yesterday when he said:

"My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary,"

Yesterday's proposal by President Obama is just one more piece of a broader regulatory movement that will depress banking profit for years to come. Along with credit card reform and the changes made in overdraft charges, billions in profit are being removed from the banking industry.

The stock market reacted by having one of its worst days in months, with the Dow losing 2% of its value. It is hard to blame all of this on Obama's announcement though. JP Morgan was down 6% while Goldman Sachs was only down 4%. Goldman stands to lose far more from the proposed regulation than Chase.

I think the decline is more a realization that President Obama and Congress will reform the banking system. For better or worse, the party is over for Wall Street. They would have been wise to forego some profit today for bigger gains tomorrow. But as we know, Wall Street is always about the present ahead of the future. Well, right now, I'd say the NPV of their actions is pretty low.