New Yorkers...and the Rest of "The Rich Financiers" Under Attack

Posted by jeff

Thu Dec 10th, 2009 10:33 AM

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"I didn't set out to save Wall Street. I set out to save Main Street. But to save Main Street, I had to save Wall Street." - Ben Bernanke

The quote above from the Fed Chairman was his attempt to explain why the U.S. taxpayer has contributed heavily to an increasingly unpopular bailout of Wall Street - a situation where talk of big winnings in the markets this year and huge bonuses only further inflames the populace.

In a Wall Street Journal article this morning by David Wessel entitled "The Public's New Fear of Finance," he refers to Bernanke's quote and opines that "Many Americans see simpler logic: Wall Street got bailed out, and Main Street didn't. They are looking for someone to blame. The truth is that the list of checks on the financial system that failed is long; it is hard to identify any one that worked. But the public wants a culprit, and they have found a couple of candidates. One is big finance itself."

Later in the article Wessel quotes Paul Volker, probably the most respected central bank chief the U.S. has ever had (sorry Greenie, you've fallen a few notches, despite the teary eyed "I never imagined this could happen" mea culpa) in a speech to a Wall Street Journal sponsored Future of Finance conference. Volcker derided bankers that "You have not come anywhere close to responding with necessary vigor to the crisis we have had."

Flip a few more pages through the Journal and you will see that there is no reason for Volcker to worry about bankers' failure to act; politicians and regulators are about to act for them. Today's Journal contains articles about a 50% tax on financial industry bonuses being propsed by the U.K. government, while the U.S. pay czar is extending his $500,000 salary cap from top execs at bailed-out firms to employees a level or two lower. The editorial section of the Journal discusses a newly proposed 35% tax on "carried interests" also known as performance fees, the vig that helps hedgies get rich if they make money for clients. Apparently someone from Goldman Sachs heard Volcker. Just moments ago I saw a headline that Goldman's management committee will receive no cash bonuses this year.

None of this should be surprising. In fact, the only thing surprising to me is that the backlash hasn't come sooner through regulation, rather than taxation (Regulator Revenge: There's a New Sheriff in Town). My guess is it's because things looked so dire just six months ago, that Bernanke's stance voiced above seemed very rational. Let's face it, the government is pursuing the non-intuitive strategy of encouraging banks and government entities to make what are in many cases risky loans, even when the full reckoning for the bad loans already made pre-crisis is still years off. But there is a difference between saving Wall Street to save the economy and encouraging a"Trading Mentality." This is why taxes on financial transactions are becoming a favored potential revenue generator to fill holes in government budgets worldwide.

This article is in no way trying to comment on the ethics, morality or even macroeconomic impacts of punishing Wall Street for the financial crisis....I'll leave those debates up to readers. My key takeaway is, the backlash that I envisioned a very long time ago against the financial industry is just starting...likely because the economy and markets are seen as healthy enough to endure the fallout. I don't think this backlash is going to be good for the economy of New York City and New York City real estate values (particularly at the high end). So while I encouraged people to get out from under their beds and look around a few months ago. I reiterate my view that now is not the time to buy New York City real estate as an investment asset. Weigh the utility value of a move heavily in your calculus.