From the January 2012 issue of Research Magazine • Subscribe!

December 26, 2011

Target: Wall Street

This election year might change your firm and your job.

The question is not whether the financial industry will encounter a volatile and difficult political climate this election year. The question is just how tough that climate will be.

Public opinion can be expected to remain sour toward the industry in the coming months. Polls show that confidence and trust in financial institutions have been stubbornly low since the financial crisis erupted and through the recession and weak recovery.

A poll taken for CNN in October, for instance, asked: “Overall, how much do you trust Wall Street bankers and brokers to do what is best for the economy: a great deal, somewhat, a little, or not at all?” The hands-down winner was “not at all” with 54 percent, while “a little” and “somewhat” got 22 and 20 percent, respectively. “A great deal” got 3 percent, which was also the poll’s margin of error.

The Occupy Wall Street movement, of course, tapped into that well of public discontent. By late autumn, though, the movement seemed to be losing momentum, as protestors were cleared from encampments in lower Manhattan and around the country. Polls showed eroding public support for the protests, with concerns rising about both the methods and the objectives of the demonstrators.

This does not, however, translate into enthusiasm for the protestors’ Wall Street targets. Plausibly, the Occupiers would have maintained stronger public backing had they kept a more narrow focus on the financial industry. As it was, Occupy manifestos complained about everything from pharmaceutical patents to drone strikes to post-Thanksgiving Black Friday sales.

Left-Right Hybrids

Public disgruntlement with the financial industry stretches across the political spectrum. Tea Party activism arose in no small part from antipathy to federal bailouts of financial institutions. Occupy Wall Street rallies have attracted contingents of Ron Paul supporters eager to end the Federal Reserve and broadly hostile to the financial sector and in particular to the practice of fractional reserve banking.

In a November Washington Post op-ed titled “Why Occupy Wall Street Will Keep Up the Fight,” Kalle Lasn and Micah White, editors of the magazine Adbusters and key figures in getting the movement started, outlined a strategy for the Occupiers’ second phase, emphasizing a “marked escalation of surprise, playful, precision disruptions — rush hour flash mobs, bank occupations, ‘occupy squads’ and edgy theatrics.”

Lasn and White also promised that “we will see clearly articulated demands,” and topped their list with finance-related measures: “a ‘Robin Hood tax’ on all financial transactions and currency trades; a ban on high-frequency ‘flash’ trading [and] the reinstatement of the Glass-Steagall Act to again separate investment banking from commercial banking.” And they gleaned something the Occupy movement might evolve into: “with a bit of luck, perhaps even the birth of a new, left-right hybrid political party that moves America beyond the Coke vs. Pepsi choices of the past.”

It is possible that Occupy 2.0 will manage to get a financial transactions tax and the other measures mentioned high onto the political agenda — or even enacted into law. It would be unwise to dismiss the political potential of the revamped movement sketched out by Lasn and White, who after all showed considerable savvy in making the Occupy movement into a viral and brand-like product in the first place.

However, contemplating their vision, one can identify some weaknesses and pitfalls that may limit their movement’s success. For one thing, given the wildly proliferating causes and grievances that attached to the Occupy campouts in the autumn, it is questionable whether demonstrators will maintain a disciplined focus henceforth on a particular set of issues or pieces of legislation. Lasn and White’s own proposal list moves into some amorphous territory, calling for “a move toward a ‘true cost’ market regime in which the price of every product reflects the ecological cost of its production.”

Second, while the emphasis on surprise disruptions might succeed at keeping police and mayors off balance, it also runs risks of alienating the broader public. People might not want “edgy theatrics” interfering with their rush-hour commute, or bank occupations that impede the availability of their hard-earned money or, for that matter, make it harder to sit down with their financial advisor.

A third hurdle, and perhaps most difficult for the Occupiers to overcome, is that their agenda is leftist. Lasn and White are savvy in trying to brand their movement as a “left-right hybrid,” because appealing to multiple stretches of the political spectrum offers a way to circumvent the gridlock between left and right that characterizes politics today. But their particular proposals, amounting to a buildup of taxes and regulation, are unlikely to win much support on the rightward side of the political spectrum, including from the Ron Paul enthusiasts who have shown an Occupy affinity.

Downsizing the Banks

One policy idea that might gain considerable traction has emerged not from the Occupy movement but from the GOP presidential field. It has elements that could hold appeal across diverse portions of the political spectrum, and thus it might be a relatively viable left-right hybrid. The idea is to downsize the largest financial institutions so as to end their Too Big to Fail status and prevent future bailouts.

Jon Huntsman, the former Utah governor and Obama ambassador to China, is the presidential hopeful most closely associated with this line of thought. He unveiled a plan in November focused on limiting bank size by charging a fee on assets above a certain percentage of GDP. The plan also raised the possibility of imposing a hard cap on asset size, and Huntsman pushed for tighter capital requirements and limits on leverage, as well.

Huntsman has been considered a long shot in the GOP primaries, but his poll numbers began edging upward late last year, possibly because of his bank-downsizing plan, along with his rhetoric about rival Mitt Romney being “in the hip pocket of Wall Street.” Huntsman has placed much of his funding and energy into this month’s New Hampshire primary, hoping to emerge from that New England gauntlet as a serious contender in the race.

Still, even if Huntsman is not the nominee, the bank-downsizing idea might well have staying power in the presidential race and beyond. Other GOP hopefuls, including Newt Gingrich and Rick Perry, have spoken of oversized financial institutions as a problem. A GOP electorate averse to taxes and regulations might see merit in measures aimed at disallowing future bailouts. (Plus, Huntsman proposes to use fees collected from banks to finance tax cuts for non-financial companies.)

For liberals, a downsize-the-banks push could have the appeal of taking a firmer line against Big Finance than did the Dodd-Frank legislation, which expanded regulators’ oversight of “systemically important” institutions but which is widely seen as having fallen short of ending Too Big To Fail. One could imagine President Obama signing onto to something like the Huntsman plan, though it would mean a tacit acknowledgement that his signature financial legislation was inadequate in this regard.

If a bank-shrinking effort gains steam, it can be expected to meet much resistance, not least from the targeted big institutions. One argument sure to rise in opposition is that the policy would “punish success.” That claim, though, is weakened by the big banks’ recent growth stemming in major part from the financial crisis and resulting government-backed mergers, hardly evocative of “success.”

For advisors, an effort to downsize financial institutions is a daunting prospect, though if enacted it surely would create winners as well as losers. It would mean that the shakeout already occurring in the field becomes more intense, as big institutions shed some of their assets. That would translate into layoffs for some, but also opportunities at smaller institutions or in going independent.

This election year there will be a great deal of rhetorical bombast directed against the financial industry. Much of it may be mere background noise for financial professionals going about their jobs. But if “Downsize Wall Street” emerges as a catchy political slogan, be sure to pay attention.

Kenneth Silber is senior editor of Research magazine.

 

Reprints Discuss this story
This is where the comments go.