What Obama Is Really Saying About Reforms.

Much has been made of President Obama's big speech he made yesterday about Financial Reforms. It was quite an eloquent speech like all of the Presidents speeches are, but one thing is certain....The more rules, regulations, reforms are made...the more things stay the same. Its always been business as usual on Wall Street.

Why do I feel this way? Well...After spilling nearly $3 Trillion unto the banks and making every possible socialist accounting trick magically appear on Bank Balance Sheets, you actually think they are going to kill the golden goose? Or what ever is left of it? No chance! Obama and his boys have too much riding on Wall Street malfeasance. There is too much at stake now to inflict anymore crippling pain. Like it or not...The Tax Payers, Blankfein, Dimon, Lewis, Obama, Geithner, and Bernanke are all uneven partners in this mess. They need to come out and again placate the masses to pull the wool over peoples eyes like they have been doing for centuries.

What really is happening is that even though Obama didn't conjure up "Too Big To Fail" or "Systemic Risk", he has created "To Big To Succeed".

President Barack Obama outlined what he envisions for future regulation of the financial system. He called his plan "a new foundation for sustained economic growth. His plan, if adopted, will fundamentally change the nature of our financial system and economy, for good or for worse.

According to the administration white paper circulated prior to the president's speech, the Federal Reserve would be authorized to create a special regulatory regime -- including requirements for capital, leverage and liquidity -- for any firm "whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed." In addition, if a large financial firm is failing, the Treasury is to be given the power -- in lieu of bankruptcy -- to appoint a conservator or receiver to "stabilize" it.

Designating particular financial firms for this kind of special regulatory treatment clearly signals to the markets that these institutions are "too big to fail". It will reduce the perceived risk of lending to them, enabling them to raise funds at lower cost than their smaller competitors.

Simply stated, the Obama plan would create what are essentially GSE like Fannie Mae and Freddie Mac in every sector of the financial economy, from insurers, securities firms, finance companies, bank holding companies, to hedge funds. Where these specially regulated firms are to be designated. The result will be devastating for competition. Larger firms will squeeze out smaller ones and aggressive small companies will have less opportunity to overcome the government-backed winners like JP Morgan, Goldman Sachs and BOFA.

Moreover, the administration's proposal to provide a special bailout mechanism for large firms confirms the likelihood that these firms will never be closed down or liquidated, they will be just propped up, tax payer funded, and put in a zombie status for years like AIG.

Citing the market turmoil that followed Lehman's collapse, the administration will argue that failures like this are "disorderly." and are "Perfect Storm Situations".

But failure only comes from taking non calculated and unquantifiable risks, The idea of Risk is the central theme of Wall Street, Credit, and our Economy. This is ultimately the Country's greatest asset, it failed but that doesn't mean we have to eliminate it once and for all. And it is ultimately risk-taking and its consequences that the administration's plan is intended to prevent.

I am all for Risk taking, but losses cant be socialized, yet Risk cant be eliminated all together. There has got to be a point where Risk Taking and Risk Management meet.

Going back to the Lehman debacle, the entire situation was handled horribly, it was done so violently, so hap hazardly, that the whole planet freaked out over it. We had created this perception that all financial companies would be bailed out like Bear Stearn's, all the chatter leading up to Lehman's Bankruptcy was that there were 5-6 suitors for Lehman, that the government would eventually step in and force a shot gun wedding like they did for Merrill. Well didn't happen, and what we saw was total liquidation globally across the board. When Lehman wasn't bailed out, all market participants were required to recalibrate the risks of dealing with all others, causing a freeze-up in lending and hoarding of cash. Lehman's failure itself did not cause any great substantial losses, and within two weeks of its bankruptcy filing Lehman's trustee sold its brokerage, investment banking, and investment management businesses to four different buyers. The collateral damage from the way the situation was handled caused that particular crisis.

I have always stated that the entire financial system needs to be gutted and re tooled. Wall Street is rotten to the core. That the complexity of financial products is the main reason not Risk Management/Leverage that directly led to the meltdown. Outdated quantitative models that don't properly gauge the risk of these complex products were the root cause. Yeah...Yeah...Yeah...Sub Prime can be the root, but Wall Street firms are the ones who dodged regulation and pressured the powers that be to keep rates low so that predatory lending can be inflicted. I understand that ripping apart the system is Politically unfeasible, but any talk of reforms go on deaf ears if when we are still writing checks to subsidize bank losses.