We know, we know. The president’s threatened war on Wall Street is the supposed news of the week, but to us the proposal is so convoluted and fraught with political expediency that we have yet to really figure out its impact. We are on record as favoring the type of change that was put on the table and it has the right name: THE VOLCKER RULE. Barney Frank, who ought to have jumped on this, cautions that this could be a 3- to 5-year process. When one of the most “liberal” voices in the Congress says this, we know that whatever sausage grinds its way forward it will not have a lot of spice but will be a bland concoction. Next thing we will hear is that they are convening a “blue ribbon panel.” This Congress is running from its own shadow and is now terrified of making any type of mistake.
Word comes out tonight that Ben Bernanke will be confirmed by a bi-partianship majority. When Senator Chris Dodd warned of a stock market calamity if Bernanke was not reappointed, the Senate was as limp as Bob Dole without Viagara. Bernanke will be the Man and several senators will be able to vote in opposition and tell their constituents that they stood up to the Wall Street powers (knowing of course that he will be confirmed and their will be no pain). Does the Bernanke reappointment change anything going forward? WE don’t think so. The FED will be on hold for longer than most think, especially if the onslaught against Wall Street leads to a weakening equity market. Remember former FED member Rick Mishkin’s November Financial Times piece about good bubbles and bad bubbles? The strong stock market was viewed as a positive for the economy as it was not built on leverage. The stock market strength also went a long way toward relieving some of the Pension Fund stress that was playing havoc with corporate and government pension liabilities. This is no small matter in times of a “balance sheet recession.”
An issue we think is important is the need for the Treasury to have lifted the caps on Fannie and Freddie. The U.S. Treasury has been hard at work trying to get struggling borrower’s home equity debt reworked. This is going on hand-in-hand to get workouts done on first mortgages. Under the home affordable modification plan (HAMP), first mortgage holders are not willing to do principal reductions when second lien holders and other junior lenders are not willing to make cuts. In a Bloomberg article last week, BlackRock Inc.CEO, Laurence Fink, who oversees the world’s largest asset manager, called the government’s effort flawed “because of its treatment of second mortgages,which he said should be wiped out before first liens are touched.” If second liens were wiped off the balance sheet hit to JP Morgan Chase, Bank of America and Wells Fargo would be enormous. This is a very important issue and if not reconciled, the cost to Fannie and Freddie and thus the American taxpayer is going to be huge. If it is resolved to the holders of the first mortgages, the hit to the largest banks is going to be market shaking. Put this on your radar screens.
Finally, we must respond to the news out over the weekend from Goldman’s chief European economist and top global macro analyst, Jim O’neill. We have respected Jim’s work for as long as we have traded, but the headline grabbing call of the Yuan being revalued by 5% in some immediate sense is worthless. Jim believes that the Chinese are succumbing to global pressure and will reval their currency (5%). If that is the case, Jim, give us some sense of its impact on global markets. Why do we say laughable? Because we don’t know what 5% means. We do know that when China wants to make an impact that moves hard and swift, go to your charts of Dollar/Yuan from January 1st,1994. The Chinese devalued the Yuan by 50%, from 5.8 to the dollar to 8.7 to the dollar–that was a significant statement. Oh, and it also happened to be the onset of NAFTA. 5% does not get our attention, unless of course we happen to be long.