03.02.09

Is the Worst Yet to Come?

As the Dow sinks to a 12-year low, it's becoming clear even to Obama supporters on Wall Street that his reckless agenda will make a bad situation worse.

The Dow closed today at its lowest mark in 12 years, and now it's becoming clear even to Obama supporters on Wall Street that his reckless agenda will make a bad situation worse.

If you want to understand why, despite his popularity with the general public, Barack Obama is losing the confidence of Wall Street, all you really have to do is speak to his supporters on the Street. There are many, contradicting the long-held myth that the bankers, investors, and hedge-fund traders who inordinately profited during the past two-plus decades of unfettered capitalism don’t always vote as unfettered capitalists. They were a vital part of Bill Clinton’s coalition, were cozying up to Hillary, but bolted for Obama the minute they heard him speak about social justice, the need to reform the nation’s energy policy, the necessity to end the war in Iraq, and most of all, how the past eight years of George W. Bush elevated mediocrity to new heights.

Obama was anything but mediocre, they told me time and again, as the financial crisis devastated the markets and ushered in one nasty recession. And these days they are a sorry lot because they now admit they really didn’t listen to Obama. Yes, their man was elected, and they still defend their choice for president based on his obvious intelligence, grace under pressure, and for the simple fact that they couldn’t bring themselves to vote for the erratic John McCain, and the novice Sarah Palin.

It’s worth noting that one of the hottest selling stocks amid the economic misery we’ve been experiencing in the past month is gun maker Smith & Wesson.

But for all of that they can’t believe what they are witnessing: an economic agenda that is contradictory at best, and possibly reckless in its extreme. Policies that will certainly make a very bad situation even worse, and when things do get better, they will certainly not be better enough to compensate for the pain we are experiencing.

That’s what I’ve been hearing now from many of my sources on Wall Street who voted for the president, including one email I received on Friday, when after days of denying that it wouldn’t nationalize the big and troubled bank, the Obama administration, nationalized Citigroup. Treasury Secretary Tim Geithner won’t be the new CEO of Citi, but he and his minions will be calling the shots after the bank announced that to save the bank, the government will now have nearly a 40 percent stake in the company, and will become its largest shareholder by far. The markets sniffed the meaning immediately—nationalization usually means shareholders get wiped out, and this was about as close to a wipeout as there is as. Citi’s stock fell well into penny-stock territory, trading at around $1.50 a share.

But it wasn’t Citigroup that this once-proud Obama supporter, a top money manager who, if he had the stomach to have a financial proctology exam performed on payments he made to his various nannies or housekeepers, would have been offered a top job in the administration. Instead, his main complaint was about Obama’s plan to help distressed “homeowners” (not that they actually own their homes) avoid foreclosure, better known on Wall Street as the “mortgage cramdown.”

The president, of course, uses less harsh terms to describe a plan to provide relief to homeowners who can’t make their mortgage payments and may default on their loans and lose their homes. Under his plan, judges can order banks to back off from foreclosure if a family is late on its mortgage payments. That payment can be put off indefinitely or lessened to the point so that the mortgage holder can afford not to lose his home.

Sounds good right? “This is insane,” the money manager told me. “They are abrogating contracts. No one is trading these bonds and no one will if they think a judge can simply tell a mortgage holder he doesn’t have to pay what he owes.”

To this money manager and many others I speak to, the mortgage cramdown is just one of many contradictions in the economic policies of the Obama team. Part of the reason Treasury Secretary Geithner has received such low marks so far is that he hasn’t produced a plan to save the banks that are still holding more than $1 trillion in bad mortgage and real-estate debt. It’s the reason the banks still aren’t lending money; if they sell these securities at market prices, they have to write down massive losses and become insolvent, barring a massive government bailout.

Geithner says he’s working on a plan to unclog the system—to have the banks sell the toxic assets at a price that wouldn’t result in massive losses. Yet the president’s mortgage plan assures just the opposite; if a judge can simply say that a homeowner doesn’t have to pay his entire mortgage payment, the bonds that these mortgages are packed into fall in value. “We need foreign buyers to come in and make a market in this stuff,” the manager told me. “They’re never going to come back to this market if this thing passes.” He says he made the same comments to Barney Frank, the head of the House Financial Services Committee, but he isn’t sure if Frank got the message. “I will tell you this, if the cramdown makes it into the final budget, it’s going to be worse than Lehman Brothers.”

It’s a pretty scary thought and one I don’t buy in its entirety. That week in mid-September 2008 that Lehman imploded was as close to financial Armageddon as this nation has seen since the 1929 stock-market crash.

And yet, while the end of the financial world may not be at hand, there is a growing sense among people who understand the markets that things could still get dramatically worse, even as the Dow Jones Industrial Average hovers around 7,000, about half the level of its high point before the crisis began two years ago. I know there are many in the punditocracy who say with some justification that the last place we should be taking advice is from Wall Street. These are the same people, after all, who recklessly invested in risky mortgage bonds that initially paid huge dividends to the firms, showered massive bonuses on their CEOs, but in the end, led to massive losses that, barring near-nationalization of banks like Citigroup, would have destroyed the banking system altogether.

But Wall Street is bigger than Citigroup, Bear Stearns, Merrill Lynch, and Lehman Brothers or all the formerly high rollers that bet wrong with their investors’ money and put the country into hock. Wall Street, if you haven’t noticed, is now Main Street, which is why the president’s economic policies may prove to be so disastrous.

The democratization of the markets that began under President Clinton means that you really can’t penalize Wall Street without extracting a pound of flesh from Middle America. Keep in mind, the president is proposing one of the largest expansions of the federal government in modern history.

People compare it to FDR’s New Deal, but it’s only fair to point out that Herbert Hoover’s taxes on the rich and restrictive trade policy, which preceded the New Deal, were hardly free-market-oriented. And when Roosevelt tried many of these same measures, coupled with a massive expansion of government that crowded out business investments large and small, the economy got worse, not better. The stock market’s various declines that occurred throughout the 1930s and well into the 1940s reflected the disconnect between Roosevelt’s economic policies and the economy’s health. A quick check of the Dow Jones Industrial Average shows a series of fits and starts and no recovery until well after World War II.

God help us if we are now to relive the 1930s and early 1940s. Back then, average Americans didn’t save for retirement through 401(k) plans; public-employee retirement funds weren’t invested in things called “alternative investments,” a fancy name for what everyone on Wall Street calls hedge funds. The investor class, as it is known, extends well beyond the headquarters of the big banks in Lower and Midtown Manhattan.

All of which is bad news for the president as he attempts to save America from the sins of the market. But by raising taxes on all those greedy Wall Street types who make $250,000 or more, by impairing small businesses and entrepreneurs with payroll and capital-gains taxes, as he plans to do in the years ahead, by borrowing so much money to fund a stimulus package filled with pork only Nancy Pelosi could love, President Obama isn’t taking aim at Wall Street, but Main Street as well.

In the meantime, I’d like to pass on a stock tip from a source of mine. While I don’t usually make stock recommendations, and I’m certainly not recommending this one, it’s worth noting that one of the hottest stocks amid the economic misery we’ve been experiencing goes under the symbol SWHC, or gun maker Smith & Wesson Holdings Corp. It’s up around 70 percent, and at least in my mind, this isn’t the flight-to-quality the markets need.

Charles Gasparino appears as a daily member of CNBC's ensemble. He is also a columnist for Trader Monthly Magazine, and a freelance writer for the New York Post, Forbes and other publications.