Obama & the banks

Posted on: 01 February 2010 by Mark O'haire

If you fully understand what Barack Obama is doing with the swashbuckling banks, you will note the financial world as we know it will never ever ever be the same, according to Peter McGahan.

In May 2008, I wrote a column 1300 words long, which said that banks were at the heart of spikes in commodity prices such as oil, wheat, maize etc. That article was pretty much ignored by the investment companies who were making so much money off the back of it – until they weren’t. That was the day that oil plummeted and every other commodity with it.

Most of us know we can buy shares and we sit and hope they will go up. What is quite sinister and worrying however is that it is possible to also make money betting on stocks and shares to go down.

Think it through. If you could in some way use your clout to talk a share or market up (commonly called ramping) to a point that it was overvalued, you could then make similar numbers betting that the price would fall and use your media clout again to ‘de-ramp’ the share by talking it down. Naturally that would be morally wrong wouldn’t it?

If this was left open, the stock market could just be a merry go round of someone pushing up prices and then pushing them back down again. The only winners would be the banks, as customers would remain in exactly the same position whilst bank bonuses would redistribute your wealth to them on an annual basis.

In May 2008 I showed that investments in commodities through index traded strategies had leaped from an all time historic high in 2003 of $13bn to an amazing $260bn in 2008. The price of all commodities had artificially soared with it, and we all paid for that through the supermarkets and petrol pumps.

In the U.S. it transpired that the body which was put in place to govern this practise (CFTP) had actually relaxed the rules. So much so, investment companies could buy $100 dollars worth of commodities by putting down just $8 and borrowing the rest.

This was a bubble waiting to explode. It also allowed banks to create ‘swaps’, a method of making and investment and effectively ‘hiding’ it by creating a separate swap with a bank.

The result of this is that speculative investments could then be created way beyond the normal market as investment banks borrow to invest. The result – we all pay more for our food, metals, oil etc.

President Obama has made it clear to the banks: ‘If these folks want a fight, it’s a fight I am ready to have’ – good man.

Goldman Sachs borrowed an astonishing £10bn from the U.S. government in 2009. Goldman’s bonuses and incomes are now under fire, especially when it has become clear their average income per employee is £300,000. The chief exec received $68 million in 2007, which should have been enough to feed the kids.

So what might the impact be? President Obama, surrounded by his economic advisers made it clear he would halt proprietary trading where banks were being allowed to risk huge sums of money predicting the prices of oil/commodities etc. His concern is not only about the scenario of ‘heads, the banks win; tails, the tax payer bails them out’.

The major issue is that the process of buying up such speculative investments effectively forces prices through the roof and can cause economic mayhem.

Normal supply and demand creates the price of markets and goods and they should not be allowed to be artificially manipulated by speculative investors, whether that is up or down.

The average price of oil is c$32 and there is no reason why oil should be any different than that. Today oil sits at $74.18.

If President Obama gets his way, these banks will be brought to their knees, all speculative positions removed, and market forces will bring our petrol, food and metals plummeting down to earth. Normality resumes.

By Peter McGahan

Need Expert Advice?

Peter McGahanPeter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.

Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.

Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'

Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.

If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email info@wwfp.net.

 

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