Obama and Wall Street

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The crux of The New York Timespolitical story du jour is that Obama is now trying to repair relations with previously supportive Wall Streeters because they’re mad at him:

Mr. Obama, who enraged many financial industry executives a year and a half ago by labeling them “fat cats” and criticizing their bonuses, followed up the meeting with phone calls to those who could not attend.

There are two things worth gnawing at here. One: Obama’s motivations. It’s not surprising that Obama is thinking about big-donor cash as his reelection effort gears up. Outside money (likely favoring Republicans) will play a larger role in this cycle than in 2008, and it’s standard for a President to use the trappings of office to woo such a moneyed constituency . Though I don’t think we’ll know for sure until this year’s second quarter fundraising numbers are released, there’s a decent possibility that Mitt Romney has won over some major Wall Street donors who gave to Obama in the past.

Two: Wall Street’s motivations. This is not about the “Fat Cats” crack. It’s not even about bonuses or the populist financial industry tax Obama was floating at the time. It’s about Wall Street’s bottom line. If it works properly, the financial regulation Obama signed into law will dampen profits on the Street. Less risk means less profit (in good times).

A good example: Banks have been caterwauling that no one will be able to get a mortgage under new Dodd-Frank rules governing downpayments and income-to-monthly payment ratios. What they’re not mentioning, of course, is that those new rules only say that banks needs to retain some skin in the game — 5% — if they’re making anything less than a bulletproof loan. Banks can still give out all the low-downpayment mortgages they want. But now they will have a vested interest in determining whether the loan can realistically be paid back. (Appalling, right?) Safer mortgages mean less profit. So does having a stake in riskier loans.

The same dynamic extends to other parts of the law: If banks have to hold more capital in reserve, that means less money they have to earn with. Derivatives being traded in the open? No more dealing to customers who don’t know how much the other guy is paying. Mega financial firm going under? If the new orderly liquidation authority works as intended — granted, that’s an if — they can’t socialize the risk with a no-strings-attached deal from the panicked government. In a way, one good test of Dodd-Frank’s effectiveness will be to try to determine if Wall Street profits are less than they would have been otherwise.

For those accusing the President of merely groveling to an industry he supposedly let off easy on financial regulation, just consider this: Obama didn’t have to pursue financial regulation legislation. There were compromises to be sure; he didn’t take an axe to largest institutions and he didn’t follow through with an industry tax to recoup losses from the bailouts or pre-fund some of the liquidation authority’s operating costs. But he didn’t have to do anything at all. And when the chips were down and some powerful Democrats were telling him to jettison Elizabeth Warren’s consumer bureau and cut a deal with Republicans, he declined. Amid drastic cuts this year, he won spending modest increases for the SEC and CFTC in the 2011 budget.

It’s now in President Obama’s interest to make up with Wall Street. As always, it’s in Wall Street’s interests to try to maximize profits. But let’s not pretend this is about name calling. If suffering through a few “fat cat” epithets would net a few dollars , I have no doubt they would do it.

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