THE BANKERS NEED TO FIGHT BACK / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( HIGHLY RECOMMENDED READING )

The bankers need to fight back

By Robert Sloan

Published: April 13 2010 23:06

When President Barack Obama was inaugurated just over a year ago, comparisons to Franklin Delano Roosevelt had already begun. Mr Obama does seem to be following the FDR playbook in confronting the recession, at least as far as allocating blame is concerned. If Wall Streeters – and not just those taking exorbitant bonuses – want to know what their future holds, they would be advised to look to the past. They might still be able to avoid a repeat.

In 1933, the newly-inaugurated FDR recognised he inherited a populace enraged by the effects of reckless greed in the financial markets. The Pecora commission, which began the year before FDR assumed office, not only aimed to unearth the causes of the 1929 market crash but also rightly skewered the bankers for running what many considered to be a rigged game. It resulted in the political defenestration of several well-known Wall Streeters. The new president wasted no time in stating to the public whose side he was on. What few realised at the time is that FDR’s populist rhetoric set off a wave of anti-Wall Street sentiment that far outlasted Pecora.

Last summer, when Mr Obama appointed Phil Angelides, California’s former Treasurer, as chairman of the bipartisan Financial Crisis Inquiry Committee, many on Main Street began to expect, if not thirst for, another body count.

This generation of Wall Street bankers must remember that if history repeats itself, the effects of the FCIC will not stop when it delivers its report to Congress at the end of the year. The enmity for Wall Street caused by the Pecora commission lasted decades, surviving the second world war and the postwar period of extraordinary prosperity. If today’s bankers are not prepared to explain why this country needs a strong Wall Street, the impact on finance this time around could be much worse.

Pecora was followed, after the 1937 panic, by the larger Temporary National Economic Committee inquiry, which left 37 volumes of printed testimony – but was muted by the war. Of its many shortcomings, the TNEC did not provide the US government with a precise case, and public unease towards Wall Street persisted. Furthermore, the populace’s feelings were now being ossified into law, the result of a generation of New Deal politicians – bonded by their distrust of Wall Street – now firmly established in power.

In 1947, in the hope of finally bringing Wall Street to its knees, the US Department of Justice sued 17 investment banks for antitrust violations. The case would last six years and eventually be dismissed by a federal judge in an unmistakeable sign to Washington that it should step back.

The day the verdict was read Main Street’s hegemony ended and Wall Street’s long march back to power began. Its efforts to push back federal power peaked with the repeal of the Glass-Steagall Act, which divided investment from commercial banking. Though it might sound oversimplified, the life of the bill from its inception in 1933 to its repeal in 1999, mirrors the full swing of the pendulum between Wall Street and Washington. Animus against Wall Street lasted 20 years, and it took another 46 years for it to swing the pendulum back its way.

Looking back even further, the clash between Wall Street and Main Street shouldn’t strike anyone as surprising. The country was founded upon opposing ideologies. Alexander Hamilton believed in a strong federal bank and its counterpoint, financial markets, while Thomas Jefferson had an inherent mistrust of speculation. These philosophies have duelled for centuries and will continue until the pendulum stops swinging.

Unfortunately for Wall Street, the stakeholders in today’s recreation of the 1929 drama and its aftermath – the public, politicians, regulators and financial titans – are playing their roles the same way they did 80 years ago. If banks once again fail to formulate a response to the acid of public opinion – to meet the populace’s Jeffersonian argument with their own Hamiltonian counterargument – it will have a profound effect on their balance sheets. While the 1929 crash had crippled their finances, government intervention set back their recovery and their combined capital at the end of the Justice Department’s lawsuit was many times less than it had been at the height of the market.

The hope of some financiers that the public will move on from the current economic crisis seems like a pipedream. If Wall Street wants to avoid a decade-long recoil it must respond forcefully, with vision and passion, and set out why its function is central to America’s capitalism, democracy and philosophical heritage. Wall Street should explain why a country with 5 per cent of the world’s population controls 20 per cent of its wealth: one reason is that major capital sources, from petro-dollars through Chinese trade dollars to Japanese savings, head to New York, where their owners can buy and sell financial instruments and find deep liquidity.

Instead of sitting silently and taking a beating, Wall Street should be explaining why its ability to attract capital is a national treasure. Shortly after new short sale restrictions, while Christopher Dodd’s financial reform bill was gaining momentum in the Senate, China announced that it would allow short-selling. Perhaps the Chinese have started their own modern-day Long March towards attracting the very capital flows that Wall Street seems too cowed to defend.

The writer is managing partner of S3 Partners and author of ‘Don’t Blame the Shorts’

Copyright The Financial Times Limited 2010.