WASHINGTON, May 1, 2017 – Crazy days are here again, at least on Wall Street this happy May Day 2017. Stocks started out morning trading action in a moderately sunny mood. But then, equity markets were hit with heavy selling on news that
“President Donald Trump is considering breaking up the nation’s biggest banks, a vow he had made during the presidential campaign then seemed to put on the back burner.
“Trump said he is ‘looking at that right now,’ in an interview with Bloomberg News.”
“Major averages slipped as the news broke, then rebounded, while government bond yields hit their highs of the day.
As stocks did their 180, in an ironic twist,
“…bank stocks rallied, with investor taking a win-win view: Breaking up the big banks would open business opportunities for smaller institutions, while the large Wall Street firms would be worth more as separate entities than they are combined.
“‘The theory has always been the sum of the parts is worth considerably more than the whole,’ said analyst Dick Bove, vice president for equity research at Rafferty Capital Markets. ‘You might find a lot of investors who say that (if) they’re going to break up these banks, they’re more in pieces than they are together, I’m going to buy them.’”
You can’t make this stuff up. Maybe this latest musing by the president will cheer all the Bolshies out demonstrating against him today, this day of days, when Commies and Marxists of all stripes step out smartly, banners in hand, to celebrate the glorious Workers Paradise they’ve tried – and failed – to construct for well over 100 years and counting. No hugging, no learning for these nasty numskulls and their fake religion.
As we write this article (2:05 p.m. ET), the Dow is back up 23.32 points (+0.11 percent), followed by the broader-based S&P 500, up 8.43 points (+0.35 percent) and the tech-heavy NASDAQ, which is currently up 49.92 points for a tasty +0.82 percent gain.
If the “re-rally” in big bank stocks today seems difficult to understand, it’s actually not. Countless overly-huge American business conglomerates have, over the years, enjoyed significant stock price boosts whenever the likes of Carl Icahn, et. al., take fairly large positions in their shares, as traders and investors slaver over the usual robber baron disclosure that they want to boost “shareholder value.”
That time-honored if shopworn phrase is thinly veiled code for “I want to sell stuff off, threaten to sell stuff off, or force the company to incur debt for share buybacks so I can make a big profit on my holdings by sucking the little guys in.”
That said, it’s not uncommon for companies to get so big that they can no longer pay adequate attention to all the varied businesses they end up owning. This means that at least sometimes, the Carl Icahns of the world are right. If those Very Big Companies would get rid of stuff they’re not really good at, they often can, over time, increase profitability considerably by getting back to what they’re really good at, which is what made these companies big to begin with.
In the case of U.S. megabanks, that might mean climbing back out of the kind of big league trading action and risky lending action that got at least some of our major banks in big, big trouble, circa 2008. Which, BTW, makes this CNBC observation more than a little weird:
“The Glass-Steagall law is sometimes blamed for the financial crisis that peaked in 2008. However, many of the big institutions at the center of the crisis were not banking behemoths but rather investment banks or, in the case of American International Group, an insurer.”
Where’d that come from? The Depression Era Glass-Steagall Act, gradually weakened in the 1990s and then repealed in 1999, kept big banks out of business that wasn’t regarded as part of their banking charter, specifically things like life insurance and, later, exotic securities like collateralized debt obligations (CDOs). So how did this law’s absence be “sometimes blamed” for what happened in 2008?
Once Glass-Steagall was abandoned, however, the wild rumpus began in the financial industry and we’re still feeling the negative after-effects even today, as in the persistent unwillingness of major banks to loan any money at all to John Q. Public.
This columnist, who once worked in the financial industry, long-opposed dumping Glass-Steagall. But for some reason, no one was listening at the time. But within less than 10 years after eliminating the last remaining bits of Glass-Steagall, we ended up with, surprise! Great Depression II, aka, the Great Recession. Who knew?
Sometimes, old traditions and old laws were actually good for people and consistently worked positively over months, years and decades. The tendency, at least in the U.S., is to always seek to modernize everything, often just for the heck of it, but usually to confer some kind of unfair advantage on protected classes. In this case, getting rid of Glass-Steagall enormously advantaged big banking, mortgage and insurance tycoons, which is why that law’s provisions were gradually eroded to begin with.
What robber baron, after all, wants to have his or her wealth limited to just a few hundred millions of dollars when eliminating some allegedly archaic law might earn them a few extra billion (with a capital “B”) dollars. For the past ten years or so, we’ve seen how that works.
In any case, without Carl Icahn even having to lift a wealthy little finger, President Trump has set big-bank breakup speculation back into motion. The fact that banking stocks are up today on the prospect is clear proof, at least to us, that once again, there may very well be some merit in going back to the future, at least where financials are concerned.
We suspect a move like this won’t happen. Like it or not, it’s President Trump’s custom to float our at least three or four trial balloons a day, and this was one of them. Realistically, bank lobbying pressure in DC remains far too great to allow a Glass-Steagall re-imposition to ever happen. But it’s pretty to think it will, and right now, that’s exactly what Wall Street is doing.
Selling in May and going away might indeed be a productive idea this year. But who knows? Maybe next year, we’ll find ourselves in that Workers’ Paradise at last and not have to worry about mundane things ever again.