The fall in the market was triggered by President Obama’s remarks about splitting up banks.  So what’s behind this split and what would this mean for the banks in the long run?
The first thing to notice is the timing.  The Democrats lost one of their safest seats in the Senate last week.  This can’t help but scare a politician.  It seems to have given the Obama team a taste of their political mortality.  There would have been some scare like this at a later stage, but they broke the glass earlier and got some crowd pleasing populist measure where they were on the right side of public opinion.  Telling a load of Americans that they would socialise medicine, get them to queue and lose benefits so that illegal immigrants could get health care was never a vote winner.  Now they’re acting as if the voters matter.
So they’ve attacked the banks.  The really surprising thing about the banks so far has been the way in which the banks have not felt any meaningful, and that means legislative, public anger.  In America this is partly because both parties have bank funding and over in the UK the UK government will go bankrupt if one of the banks that it now owns goes out of business.   Now President Obama realises he’s got to be nasty to the banks and even talks of reintroducing the separation of functions that the Glass Steagall Act of the 1930s forced on banks.
As long as banks are being guaranteed by the public purse they are going to lose the bits that are just glorified hedge funds.  However this does not mean the end of banks.  The bond market is dead, so they have no competition for loans.
My most successful trades last year and the year before were long on banks.  They were trading at silly lows and there was easy money.  I don’t think that the money is as easy any more, but the banks still have the lending market almost all to themselves.  Yes they will have to get rid of some of the more exotic activities and look less like hedge funds but they are still oversold.
If you’ve got a strong stomach we think that there are going to be some dips to go long on the banks.