Tags: Whalen | Obama | street | Risks

Banking Expert Whalen: Obama Has Ignored ‘All of the Fraud on Wall Street’

Friday, 11 May 2012 10:02 AM

President Barack Obama's economic policies are fueling risk-taking on Wall Street that opens the door to hedging snafus like the one JPMorgan Chase announced, says Christopher Whalen, Senior Managing Director of Tangent Capital Partners in New York.

JPMorgan Chase has suffered a $2 billion trading loss, which the bank's CEO Jamie Dimon admits was the result of sloppiness and poor judgment.

While the president can't be blamed for that particular debacle at JPMorgan, throwing regulations on the banking sector without taking the time to really cultivate growth across the broader economy amid loose monetary policies has created an environment prompting banks to take excessive risk.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The financial sector has sent stock prices rising recently whereas other sectors of the economy are lagging, Whalen says.

It should be the other way around by now.

"We need the financial sector to be fixed to finance the rest of the economy. That's the key thing, and we are not doing that," Whalen tells CNBC.

"Barack Obama has dropped the ball. The one thing I will say about his presidency over the last four years: ignore housing, ignore all of the fraud on Wall Street."

Big banks are facing weak demand and a sluggish environment, which makes it tough to compete considering the nature of their industry anyway.

"The natural business of a money center bank, if you just look at deposit-taking, lending, the branches — it's not that profitable. So the large banks make up that lack of efficiency by rolling the dice."

Interest rates are low, which makes saving unattractive, while the Federal Reserve has pumped $2.3 trillion into the financial sector via bond buybacks from banks to spur the economy, a policy known as quantitative easing designed to ensure long-term interest rates stay low.

"The Fed is actually encouraging this reckless behavior. Because if you are a bank treasurer right now, what are you watching? You have flat operating results, and you have falling net interest margin because of the yield on your assets," Whalen says.

That leave the chief investment officer with little choice but to engage in risk.

"You almost have to roll the dice to help the enterprise to hit the earnings number. That's what it comes down to."

Greater economic growth would solve the problem.

"What you want is the rest of the economy to grow," Whalen says.

Big banks have spearheaded criticism against the Obama administration's regulatory policies, especially the Volcker Rule, which would ban banks from trading their own money in capital markets.

The rule is currently under study, but expect it and other regulations to grab more of the spotlight in the coming days, especially since the hedging loss took place at JPMorgan Chase, which came through the financial crisis largely unscathed.

"It's a pretty stunning admission for a company that prides itself on its risk management systems and the strength of its balance sheet," says Sterne Agee analyst Todd Hagerman, according to Reuters.

"The timing couldn't be worse for the industry. It will have ramifications across the broker-dealer community."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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Friday, 11 May 2012 10:02 AM
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