Suddenly the Billionaires Care About the 99%

I have just read two articles, one by Mr Stephen Schwarzman, CEO and co-Founder of Blackstone in the Wall Street Journal (WSJ) and the other on Mr Jamie Dimon, CEO of JP Morgan in CNN Money. They are both members of the billionaires club thanks in a large part to the excesses associated with Quantitative Easing  (QE)which created ferocious bull markets predicated on essentially free money.

Now they both have suddenly got religion and are out explaining how the the Dodd-Frank Financial Regulations are the harbingers of the next financial crisis and how this will hurt the mom and pops of the world.

The culprit: a liquidity crisis which Mr Schwarzman attributes to the prohibition on proprietary trading by the banks.  He explained that this prohibition, when combined with enhanced capital and liquidity requirements has led banks to avoid some market-making functions in some key equity and debt markets.

Really?

In the same article Mr Schwarzman tells us that Deutsche Bank noted that dealer inventories of corporate bonds are down 90% since 2001.  And this despite the outstanding supply of corporate bonds almost doubling.  Funny that.  I could have sworn that the Great Recession started in 2007.
And the doubling of outstanding corporate bonds has been driven by QE which was inaugurated in 2008....

Mr Dimon on the other hand, whose bank is one of the largest issuers of corporate bonds was quoted, along with a 'slew' of other smart people on Wall Street that there is a liquidity crisis looming and "...in a crisis there might not be enough bonds to go around".

So which is it.  Is there going to be a liquidity crisis because there won't be enough bonds around?  Or is the prohibition on proprietary trading, which is run solely for the banks profit, stopping those same banks from fulfilling their role as financial intermediaries and helping facilitate a fair and orderly market- and thus contributing to a liquidity crisis?

I'm not sure that either of them know.  But the cake goes to Mr Schwarzman.  His concern for small business owners, farmers and local real estate markets is predicated on the fact that the traditional lender to this segment of the economy are the Community Banks.  Their number has decreased 41% since 2008, and he blames this on Dodd-Frank.

Selective memory perhaps?

The major cause of the demise of the Community Banking sector was that they all held the preferred stock of the housing related government-sponsored enterprises (GSE's)-Fannie Mae and Freddie Mac which went into conservatorship before Dodd-Frank.

Banks were able to hold considerable amounts GSE preferred shares because, even though banks are normally restricted from investing substantially in equity securities, an exemption to the standard limits on permissible equity securities was established for the GSE investments.

Some will cry that Mr Frank and Congress were behind this, trying to expand home ownership in the United States.

Other more sanguine observers will remember that the reason the real estate related GSE's went bankrupt was that the major banks and unregulated private lenders stuffed them with sub-prime loans rife with major documentation problems.

The truth is that all of these highly respected billionaires have been against financial regulations from the start.  Wall Street smells blood and is starting to flex their muscles in the political corridors of power to try and roll back history.

They have learned though. This time they are cloaking their desires in the guise of wanting to protect the little guys- and reopen the floodgates to unregulated financial markets.