Will Obama Go Soft on Wall Street?

Is Barack Obama -- and everyone else -- going soft on Wall Street?

To mark the anniversary of the collapse of Lehman Brothers -- which kicked-off a historic meltdown within the banking system -- the president on Monday is scheduled to give a mid-day speech at Federal Hall in New York's financial district. Before he headed to the other Ground Zero, what Obama would say was predictable. He would hail his administration's economic record, contend that its handling of the various bailouts and the stimulus package prevented further economic disaster, and outline his various proposals for financial re-regulation. But how hard was he really going to whack the financial wizards who waltzed the U.S. economy into a ditch while lining their own pockets? It's darn easy to decry this bunch in vague, abstract terms. But going after the speculators and money-manipulators for real is not so easy.


Consider this recent front-page New York Times article summing up what's happened on the Street the past year:


Bottom line: no fundamental change in business as usual. The financial industry's continued reliance on unregulated derivatives -- complex, hard-to-understand financial instruments that enable all sorts of wheeling and dealing -- is particularly frightening. And last month, the Congressional Oversight Panel, which oversees the $700 billion TARP bailout, released a report noting that the financial system is still polluted with troubled assets that could lead to another debacle.

The Obama administration has pledged to clamp down on excessive CEO pay and to move ahead with new financial reforms. In fact, White House press secretary Robert Gibbs has cited financial re-regulation as a legislative priority for the administration -- after health care reform. (One reason why: after pushing a series of initiatives with big price tags, it won't cost the White House billions of taxpayer dollars to tighten up regs for Big Finance.) But it remains to be seen how much the White House will push for basic change in the financial system.

There are some decent proposals on the table. One calls for creating a regulator with responsibility for overseeing the soundness of the entire financial sector; another would establish a financial products safety commission that would evaluate financial products being peddled by credit card companies and banks to make sure they are safe and fair. Yet it's unclear if the White House will be able to enact such reforms into law over the objections of Big Finance lobbyists, their pals in Congress, and current state and federal regulators who don't want to see their turf invaded by new entities. And even if the Obama administration does fight for these reforms and wins, these measures may not fully address the fundamental casino-like nature of modern-day finance.

The Wall Streeters seem to have a limitless ability to game the system and stay ahead of the rest of us and the regulators. Last year's financial scandal -- and it really should be considered a scandal, not as disaster -- revealed that many of the money-shifters of Wall Street make their large profits not by being right in terms of what's going to happen with an investment but by bundling, packaging, marketing and selling financial instruments before they go bad. That is, they clean up by being really good at a billion-dollar game of musical chairs. And the Times article points out that this SOP hasn't gotten less standard.

Can Obama take this on? It would be difficult. And he has surrounded himself with veterans of conventional corporate economics -- most notably, Timothy Geithner, his Treasury secretary, and Larry Summers, his national economic adviser. But Obama could be placing himself at political risk if he allows Wall Street to retain too much rope.

While dealing with all the various bailouts, the president has constantly reminded people (and justifiably) that he's had to clean up somebody else's mess. But should another economic crisis hit on his watch, he could be toast.

During last year's presidential election, there was not much populist anger about Washington's bailout of Wall Street -- to the surprise of several pollsters I know. As Lehman fell apart and the market was in free fall, GOP candidate John McCain almost took a from-the-right populist stand against then-Treasury Secretary Hank Paulson's rescue of Big Finance -- which essentially amounted to printing money and throwing it at the non-Lehman culprits. For a day or two, McCain made noises as if he might come out in opposition to this mother of all government giveaways. At that time, Obama was wrapping himself in the cloak of Larry Summers and Robert Rubin, the former Citigroup head, supporting the bailout, and at least looking steady.

I remember thinking at the time that if McCain actually had the guts to say no to Paulson's bailout, the whole election could be turned upside down. He would finally have a raison d'etre for his campaign, and he would redefine the race as one between a Main Street populist (McCain) and a corporate elitist (Obama). Never mind that McCain's campaign was loaded with corporate lobbyists. That would have been -- to use a cliché -- a potential game-changer.

But McCain jumped on the bailout bandwagon -- after looking erratic -- and there ended up being no difference between the two candidates on this matter. Now, I wonder if Obama is leaving an opening for a populist challenge. If I were a White House adviser, I wouldn't be worrying much about the Glenn Beck-following Tea Baggers who gathered in Washington this past weekend to vilify Obama and his policies. Conservative blogger Michelle Malkin and others claimed there were close to 2 million at the protest, while better estimates placed the number in the tens-of-thousands range. Moreover, this crowd seemed to be a reunion of the anti-Obama-ists I saw at McCain and Sarah Palin rallies last fall: conservatives who believed Obama was a socialist pal of terrorists and not even a real U.S. citizen. As I noted elsewhere, these are people who would denounce Obama as a communist copycat even if he managed to feed thousands of people with one loaf of bread.

Yet if Wall Street again causes economic pain for the nation, Obama will be the one left holding that big bag. For the sake of those Americans held hostage by Wall Street (meaning most of us) and for his own presidency, Obama ought to make sure he's seen as being tough on the Street. And the best way to do that is to be tough.

UPDATE: Author and former investment banker Nomi Prins breaks down the speech. Her take-away: there are a few decent reforms, but Obama is banking too much on the banks--and not forcing them to change their fundamental ways, which led to the last crisis and could lead to another.

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