Peasants, Pitchforks & Torches. Or “Why Bank Stocks are Tanking…”

Bank stocks are way down globally.  An apparent mystery!  Why?  A raft of research and commentary.  Impending recession?  Are oil bust bankruptcies big enough to cause systemic crisis?  The rot of Europe’s “extend and pretend” response to the Euro crisis?  China about to implode?  Sunspots?

More interesting is the question that hasn’t been asked.  Is the market is pricing in higher political risk?  Did the banks really escape payback for the crisis?  Or is the 95%’s revenge a dish to be served cold?  Are those pitchforks and torches wending up towards the castle?  At the least, we do seem to be heading into a less-comfortable political/regulatory/cultural climate.  Consider the following:

• This in today AFTER I drafted the rest this post.  🙂  Treasonous, traitorous treachery!  It really is a big deal though…    Fed’s Kashkari, in first speech, suggests radical Wall St. overhaul:  (Reuters) “In his first speech as head of the Minneapolis Fed, Neel Kashkari, a Goldman Sachs executive before he worked at the U.S. Treasury, urged Congress to consider “bold, transformational” rules including the breaking up of the nation’s largest banks to avoid bailouts.  “Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all,” Kashkari said, arguing that the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to the U.S. economy.“
• WTF?!?  Sen. Richard Shelby R-AL  The Republican Chairman of the Senate Banking Committee is trying to survive a Republican primary challenger by slamming the banks.   By name!?!  You read that right.  Now re-read it.  Really let it sink in….  For more see this Bloomberg News article (love his quote – points for honesty).    “Even the Senate Banking Chair Is Slamming Banks in Campaign Ads”  “Shelby, who’s being challenged by a Tea Party candidate, Jonathan McConnell, in the state’s March 1 primary, has already spent almost $3 million on TV ads—more than anyone else in Congress—many of them attacking Wall Street banks….  He said on Jan. 29 that he’d halt his committee’s work until later in March: “I have a primary, you know.”
  Political professionals have been struck by Shelby’s attack on banks not only because he chairs the Banking Committee and has received enormous largesse from financial companies—$2.7 million this Senate cycle, the nonprofit Center for Responsive Politics says—but also because his TV ads have been extraordinarily aggressive, naming individual banks such as Bank of America, Morgan Stanley, and Wells Fargo. 
• “The Big Short”  Yes, a movie.  Average people tune out a lot of news – especially if depressing/controversial/complicated news.  Yet they have been lining up to see a polemical, pretty-good-but-still-complicated movie about a banking crisis?  There isn’t an exploding fireball, superhero, or winsome-Victorian-of-marriageable-age in the whole darn thing…
  • Its been doing steady-eddie business, which means strong word-of-mouth.  Opened in December.  Months later, it is still going strong.  At 14 mostly mass-market theaters near me (admittedly the Bay Area but box office numbers have been strong/steady nationwide).  I (finally) saw it last night.  The theater was packed.
  • It flat out asserts “the system” is corrupt.   I’d guess that only 1 in 10 movie goers comes out understanding the detail.  But I’d guess 9.5 in 10 agree with that underlying message.  That other 5%?  They probably agree, but don’t mind so much… 🙂
  • Nominated for 5 Oscars – Best Picture, Cirector, Supporting Actor, Screenplay, and, well, Film Editing.  I mean, it was a good movie but…  It would have gotten ZERO from the 2007-era Academy…
  • It name-checks ALL the major banks.  This surprised me.  I would have expected some Hollywood legal team to force a fig-leaf change to “Mulligan Stanley, Gortman Sachs, Morrel Lynch, etc….“
• Bernie Sanders:  He seems to be doing quite well out there…  With a one-note campaign attacking the banks as vanguards of a “corrupt system.”  Heck, Bernie has single-handedly revived “Goldman Sachs” as a marker of moral taint (see Hillary’s $650k of bribes speaking fees).  I think Bernie would love to be President, but will settle for winning back the Senate – see “pound of flesh” under Hillary below.
• Donald Trump:  He also seems to be doing quite well.  Trump’s message isn’t coherent enough to be explicitly anti-bank.  But his supporters certainly look like an incipient peasant revolt pitchfork-and-torch brigade…
• Hillary Clinton:  Out-flanked by Sanders, she’s out blasting the same banks that she used to massage for dollars.  And Hillary is most likely the next President (more on that later).  Just wait until Sanders extracts his pound of flesh to go out on the campaign trail for her.  More on this later too, but I’d guess a big bloody hunk comes out of the “big bank regulations” policy sphere.
• Democrat’s Re-Take the Senate Baying for Bank Blood?  The Democrats have an increasingly good shot at flipping the Senate this election cycle.  Particularly if those swing-state candidates tap the raw, rich vein of populist, anti-bank anger unearthed by Sanders and Trump.  Those two sentences imply a sort of circular logic that is entirely by design.  If the Democrats do flip the Senate, the incoming senators are going to be bank-bashers.  Owing a lot to Bernie Sanders.  And Elizabeth Warren.  She has been quiet so far (waiting for Bernie/Hillary to resolve I’d guess).  But wait until she gets out on the hustings.  Fighting for a woman President, a Democratic Senate, and a pox on the banks….  That will be fun brutal.
• New Life for Individual Prosecutions?  Phil Angelides, the guy who wrote the (unlikely best seller) Financial Crisis Inquiry Commission report is goading the DoJ to act it it by, well, actually prosecuting somebody.  That pesky ten year statute of limitations…  One can argue Angelides is just a Democratic hack trying to grab headlines.  But that is exactly the point.  The political winds are shifting…  See this FT piece for the details –     “Charge senior bank bosses, says former commissioner”  Phil Angelides uncovered evidence of widespread fraud and corruption in the US mortgage market as chairman of the commission which produced the government report on the global financial crisis. Five years on, he is asking the Department of Justice why it has yet to call any senior bank executives to account…  In a letter to Loretta Lynch, US Attorney General, Mr Angelides has challenged the DoJ to take action before the ten-year statute of limitation expires.

There’s more of the above wherever you look.  Most interesting is that so few people seem to be looking there.  Even Gretchen Morgensen of the NY Times.  She spent major column inches on Sunday looking at the banks without seriously considering that glint of torches on pitchforks.  Maybe it was too far outside the castle walls.  Maybe she is buried too far inside them.  She is not alone.

But the markets have noticed.  Being reasonably efficient, they are pricing in more political risk for banks.  Being human, most market commentators are still looking for explanations in the economic sphere, not the political one.  Blithely assuming the status quo still holds.  And it might yet.  But I’d bet with the market on this one…