Elec­tion win­ner must win over Wall Street

“Yet the truth is that Amer­ica func­tions best when Wall Street and Wash­ing­ton have a sym­bi­otic rather than ad­ver­sar­ial re­la­tion­ship.”

The Pak Banker - - Front Page - Wil­liam D. Co­han

RE­GARD­LESS of whether Mitt Rom­ney or Barack Obama wins the pres­i­den­tial elec­tion Tues­day night, one of the first or­ders of busi­ness will be to re­pair the deep rift be­tween Wash­ing­ton and Wall Street. Plenty of Amer­i­cans may feel that the an­tag­o­nism be­tween the two is use­ful -- and lord knows there have been times in re­cent his­tory when the re­la­tion­ship be­tween the power cen­ters in Wash­ing­ton and New York City has been un­bear­ably cozy. Yet the truth is that Amer­ica func­tions best when Wall Street and Wash­ing­ton have a sym­bi­otic -- rather than ad­ver­sar­ial -- re­la­tion­ship.

So, which­ever man wins, he should get to work im­me­di­ately on im­prov­ing the vibes be­tween Wash­ing­ton and Wall Street. Here's how to do it, in three sim­ple steps: First, don't pre­tend the prob­lem doesn't ex­ist. Yes, it is true that dur­ing the past four years Wall Street has ben­e­fited enor­mously un­der Pres­i­dent Barack Obama -- from the tril­lions of dol­lars used to bail out failed firms to the dou­bling of the Stan­dard & Poor's 500 In­dex (SPX) since its 2009 nadir to the fail­ure to put in place mean­ing­ful reg­u­la­tory re­form to the Fed­eral Re­serve's de­ci­sion to keep in­ter­est rates low. Yet Wall Street doesn't see it that way, and the an­tipa­thy is pal­pa­ble.

So while Obama may think it was only his one lit­tle tele­vised com­ment about "fat-cat bankers" draw­ing huge bonuses dur­ing the fis­cal melt­down, the anger per­sists.

And, while the shift to Rom­ney has been stark -- Gold­man Sachs Group Inc. and its em­ploy­ees were Obama's big­gest sup­porter four years ago; those riches have mostly gone to the chal­lenger this time -- it doesn't mean ei­ther side will for­get the last four years should he win. The Dodd-Frank re­form act re­mains the law of the land, banks re­main un­der the (of­ten heavy-lid­ded) eye of the watch­dog agen­cies, and uber-cap­i­tal­ist Rom­ney, one hopes, un­der- stands that mar­kets won't func­tion un­less the peo­ple have faith in them be­ing fair.

To put things on a new foot­ing, I sug­gest a week­end re­treat in early De­cem­ber to Camp David (if Obama wins), or to Bret­ton Woods, New Hamp­shire (if Rom­ney wins), in­volv­ing both sides' fi­nan­cial and pol­icy gu­rus. I know it would be a painful and awk­ward gath­er­ing, es­pe­cially if Obama is re-elected. Even a Pres­i­dent Rom­ney would have to fig­ure out how to salve feel­ings bruised by the end­less bat­tles over how the new reg­u­la­tion of Wall Street will work. What would they dis­cuss at such a re­treat? The other two items on my agenda.

One of which is that, while fed­eral agen­cies need to quickly wrap up writ­ing the rules called for un­der Dodd-Frank, the gov­ern­ment should ac­tu­ally let Wall Street banks take more risk with their cap­i­tal than Dodd-Frank law im­plies they should. In re­turn, how­ever, Wash­ing­ton should fi­nally hold Wall Street fully ac­count­able for its ac­tions.

There are two ways to do that. One is to make the top 400 or so bankers, traders and ex­ec­u­tives at each Wall Street firm put their en­tire net worth at risk ev­ery day: their apart­ments, town­houses, week­end es­tates, art col­lec­tions, in­vest­ments and so on. In­stead of let­ting the "fat cats" hide be­hind the cor­po­rate veil if some­thing goes wrong, share­hold­ers and cred­i­tors should be able to go af­ter their per­sonal as­sets when the ship sinks.

The gov­ern­ment should al­low the ships to sink, elim­i­nat­ing in word and deed the pos­si­bil­ity of "too big to fail." Let ev­ery firm know that if it that gets into fi­nan­cial trou­ble it will be al­lowed to fail, even if it is deemed "sys­tem­i­cally im­por­tant."

The com­bi­na­tion of elim­i­nat­ing "too big to fail" and forc­ing Wall Street's brass to have their full net worth on the line ev­ery day will make Wall Street a much safer place than it has been in the past 40plus years, since one Wall Street firm af­ter an­other de­cided to trans­form from a small, pri­vate part­ner­ship into a big, pub­licly traded cor­po­rate be­he­moth.

The third step for the new pres­i­dent is to im­me­di­ately or­der fed­eral agen­cies to crim­i­nally pros­e­cute those Wall Street bankers, traders and ex­ec­u­tives whose malfea­sance caused the fi­nan­cial cri­sis. I know the flame has gone out on this front -- the Feds even failed to con­vict the two Bear Stearns & Co. hedge-fund hon­chos who were the ca­naries on the fi­nan­cial cri­sis coal mine, and even that got tossed on ap­peal -- but con­fi­dence in the cap­i­tal mar­kets won't be fully re­stored un­til the peo­ple who made a for­tune bring­ing down the econ­omy are held re­spon­si­ble.

It may be coun­ter­in­tu­itive to think that the rift be­tween Wall Street and Wash­ing­ton can be re­paired by re­open­ing this wound -- but I be­lieve those run­ning Wall Street firms, now and in the fu­ture, will ap­pre­ci­ate the fact that there will be le­gal ac­count­abil­ity for bad be­hav­ior.

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