Published January 21, 2009

Wall St struggles to celebrate Obama moment

Banking problems, fears of tighter regulation give market pause

By ANDREW MARKS
NEW YORK CORRESPONDENT

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AS America celebrated the inauguration of Barack Obama yesterday, spirits were decidedly more sober on Wall Street.

A new dawn: Schoolchildren taking part in a special ringing of the NYSE opening bell on the steps of Federal Hall across from the exchange yesterday. The bell ringing took place on the same site where George Washington was inaugurated as the first US President on April 30, 1789

Stocks opened trading on the historic day on a down note, weighed down by fresh evidence that the global banking crisis is very much alive and hurting.

While the inaugural parade down Pennsylvania Avenue got underway and huge and cheering crowds swarmed the National Mall in Washington DC, the mood on the New York Stock Exchange was decidedly less festive.

The Dow slid 50 points at the opening bell, or 0.6 per cent, following the lead of stock markets in Asia and Europe, which fell in reaction to the Royal Bank of Scotland's whopping &pound28 billion (S$59.3 billion) loss and the announcement that Britain will have to enact a second round of bailout measures for its banks.

By 12.15 pm, the bluechip index was down 122.73 points at 8,158.49.

The sombre mood of investors was understandable. The first African-American to become US President is taking his oath of office in the midst of the biggest financial and economic crisis in 70 years.

'We might see today's tide turn a bit after President Obama speaks today, but for now, investors' attention is tightly focused on the continuing crisis for the banks and the gloomy fourth-quarter earnings reports. If the president's speech effectively reminds everyone that big changes and help are on the way, you could see a quick turnaround, for today at least,' said Marc Pado, chief market strategist at Cantor Fitzgerald.

Front and centre in investors' minds when it comes to the new president is the US$825 billion worth of economic stimulus spending and tax cuts proposed by the incoming administration and the new plans underfoot for the second US$350 billion phase of the TARP (Troubled Asset Relief Program) fund.

Lawmakers have been unhappy with the way banks have used the first US$350 billion in bailout funds to chiefly shore up their capital positions rather than using it to lend to cash-strapped businesses or new home-buyers, and the Obama White House is likely to announce changes in the coming days.

One of the options discussed in Washington is to create a government-run bank to acquire bad assets clogging the system.

'It's clear that something different has to happen with TARP if it's going to fulfil its objectives to shore up the financial system and get the economy moving again,' said Joel Naroff, president of Naroff Economic Advisors.

'I think it's likely we'll see a return of the idea of getting toxic assets off the banks' books so they're willing to lend again, which if you recall was the original plan.'

But the arrival of a new White House administration also sounds the opening bell for a raft of new government policies that Wall Street has been girding for ever since Mr Obama's victory in November. These range from a broader and deeper oversight of the financial industry to measures for dealing with the credit and lending crisis beyond the bailout, which are likely to change the US banking system for decades to come.

'There's likely to be greater regulation,' says Richard Clemens, a fellow at the Center on Federal Financial Institutions, a nonpartisan public policy institute. 'And that could have happened regardless of who won the election, but I think because Obama won and because the Democratic majority were strengthened, it's likely to be more regulation than if the Republicans had won.'

The creation of a financial industry 'czar' to centralise and coordinate the supervision of financial institutions, much like what has been done for domestic security with the Department of Homeland Security, is a strong possibility, said Washington observers. Currently, the Federal Reserve, Treasury Department, Office of Thrift Supervision, Comptroller of the Currency, Securities and Exchange Commission and Commodity Futures Trading Commission, all have regulatory responsibilities, with no single agency given the lead role.

'President Obama has appointed some very strong people to the top economic posts, and Wall Street is hoping to see strong leadership from them,' said Mr Pado.

Timothy Geithner, the incoming Treasury Secretary, has long decried the lack of transparency on Wall Street and the need for appropriate regulation to ensure it.

Elements of Mr Geithner's plan to right the ship are sure to give pause to industry insiders who fear that Mr Obama and his Democratic colleagues will pull the regulatory reins too tight. Those include compensation caps, less favourable tax laws for corporations and the wealthy, and greater scrutiny of practices and assets that had largely been unregulated.

But long-time financial industry observers, such as Manhattan College professor and Wall Street historian Charles Greisst, believe that Mr Geithner's experience 'in the trenches of Wall Street' during this crisis and as a Wall Street professional himself give him instant credibility with investment managers and bankers.