Whatever he says, Barack Obama is punishing the banks

Every now and then politicians do what the voters want and in taking a new financial reform bill to the brink of signature (he hopes by the July 4 Independence Day holiday) US president Barack Obama is exacting his and the voters’ revenge for the near collapse of the financial system in 2008.

Here’s the BBC’s Robert Peston on it all.

There’s still a lot of horse-trading, and millions of dollars of bank lobbying, to come but the US will end up with a system in which opaque ‘investment’ offers are scrutinised by regulators, mortgages bear some relation to people’s ability to repay them and, crucially, it becomes easier to wind up failing banks without bringing down the whole financial system, as almost happened with the failure of Lehman Brothers.

All this, arguably, is why stock markets in the US and across the world are taking a series of hammer blows, it’s not just about fears for the Eurozone.

The Euro still has its problems of course but the latest fit of the vapours is to do with Germany’s cack-handed efforts to clamp down on ‘naked’ short sellers, punters who trade financial options without investing any money in them, even to the extent of borrowing stock.

There’s nothing wrong with such a move per se, and the US is likely to go some way towards this. Where Germany’s Angela Merkel went wrong is in rattling the financial markets without securing any sort of consensus from other European governments. So it looked like Germany, far and away the strongest economy in the Eurozone, was panicking.

So why does all this force markets lower?

Because the entire global financial services industry is going to find the cost of doing business more expensive, for some parts of the industry prohibitively so. And many investments, some of them running into billions of dollars, are going to be revealed as little more than fiction, which will likely lead to a new wave of banks and others going to the wall.

But, if a re-run of the 2008 crash caused by the collapse of Lehman is to be avoided, some unpalatable medicine (for many) is required.

The great bank bail-out, orchestrated to a large degree by former UK PM Gordon Brown, did the job at the time but was really no more than a large and expensive piece of sticking plaster. It just shunted bank debts on to public balance sheets.

Less profitable and smaller banks will find it harder to repay all this money and some may be unable to. But the bigger American banks have already repaid much of the so-called TARP money (Troubled Asset Relief Programme) while the UK government’s shares in Lloyds and RBS were about to show a profit before stock markets collapsed. In the US particularly the problem lies with the smaller banks.

As for the Eurozone it’s hard to see how some of its members, Greece in particular, can survive the level of scrutiny they’re under without rescheduling their debts or leaving the Euro entirely.

It might not come to that though. At the moment all the markets are thinking about is financial uncertainty, in the banking sector and in terms of national debts. This has led to fears that a double-dip global recession is round the corner.

But it wouldn’t take that much in terms of national economy growth figures and robust big company earnings for the markets (by which we mean the traders, mostly employed by the big banks themselves) to forget about that and concentrate on the upside.

So a reason to be cheerful? Yes, but there’s still a fair bit of further turbulence to come.

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About Stephen Foster

Stephen is a former editor of Marketing Week and London Evening Standard advertising columnist. He wrote City Republic for Brand Republic and is a partner in communications consultancy The Editorial Partnership.