An article in The Wall Street Journal raises the question: does the Obama administration care more about the secondary markets for the financial industry or does it care about the overall economy. The Administration has a little less than three years left in its tenure to figure out whether secondary markets or the overall economy should get the higher priority.
The article discusses how U.S. Attorney General Eric Holder wants to make an example of a few banks for their part in the financial crisis before his tenure draws to a close. Mr. Holder has Credit Suisse and BNP Paribas in his sights. He is reportedly narrowing his focus on whether these and other banks sold shoddy mortgage-backed securities to investors and whether the banks knew that the securities were of poor quality. The Administration has always claimed from as far back as the 2008 presidential campaign that the shenanigans of bankers led to the greatest financial crisis since the Great Depression and lays at the root of America’s economic downturn.
If under securities law investment banks sold investors some crappy securities and are shown to have violated some fiduciary duty then sure, fine them or jail a few executives. But are Americans really concerned about what goes on in the secondary markets for capital? Given the weight the financial industry has in the entire economy, is it worth the resources of the federal government and the political capital of the Administration to make grand announcements, to put on full blast, that they are going after a handful of banks?
In 2008, according to data from the U.S. Bureau of Economic Analysis, private industry accounted for 86.4% of gross domestic product in the United States. Of that 86.4%, the financial services and insurance sectors accounted for 6.2 percentage points or approximately 5.4% of gross domestic product. Financial services and insurance are a subset of the financial, insurance, real estate, rental and leasing category. That overall category accounted for 19.1% of the economy, but the real estate, leasing and rental portion double the size of financial services and insurance yet gets most of the attention from the Administration.
The secondary market for capital, where institutional and individual investors exchange securities based on their projections of a business or debtor performance is not the economy. Sure trading generates capital gains for investors and fees for the intermediary banks but this sector is not a primary jobs generator. Most American labor is not trained to work in this sector much less actually work in this sector, yet the Administration is willing to lay out blame on Wall Street and resources to prosecute it.
Let me be clear that this is not a defense of Wall Street. I personally believe that America has lost its way by becoming a financial mercantile economy where the paper trade gets more focus than actual production of innovative goods and services, but the financial sector should not be receiving an inordinate amount of attention from the Administration as part of a promise to make an example out of Wall Street.