Obama declared war on Wall Street? Or is it just the same old story?

 By now most of you should have read somewhere about President Obama's proposal to rein in risk taking by banks. If you have not, you should at least know that there was a bloodbath on stock market (and yes commodity also) around the world over the past few days. If you still have not, well count yourself blessed.

In any case, I am writing this just to give some basic understanding on what President Obama is actually proposing that had rattle Wall Street and the rest of the financial world of late.

While he has been vague on details, I believe that what ultimately Obama is proposing is similar, if not the same, with what the US has implemented in 1933 called the Glass Steagall Act (GSA).

So what is the Glass Steagall Act?

In a nutshell:

Historical Background:
The Act came about in 1933, after the collapse of the US stock market which caused the great Depression in 1929, and is largely designed to prevent commercial banks from taking on risky asset largely via investment banking activities.

Basically, the act separate the commercial banking entity from its investment banking entity.

Rationale:
Through separation of the entities, the act technically prevented commercial deposit which is being collected on a low risk basis from being channeled into high risk investment area thus stemming the likelihood of the government coming in to bailout and prevent the collapse of commercial deposit in the event of a huge investment failure by the banks (To some extent this define what it mean by too big to fail).

Why was it repeal in 1999?
The GSA is repealed in 1999, as it was deemed as too harsh and have a mixed bag of effects on the US financial sectors.

"The limitations of the GSA on the banking sector sparked a debate over how much restriction is healthy for the industry. Many argued that allowing banks to diversify in moderation offers the banking industry the potential to reduce risk, so the restrictions of the GSA could have actually had an adverse effect, making the banking industry riskier rather than safer. Furthermore, big banks of the post-Enron market are likely to be more transparent, lessening the possibility of assuming too much risk or masking unsound investment decisions. As such, reputation has come to mean everything in today's market, and that could be enough to motivate banks to regulate themselves." Investopedia

What is the impact on the financial market going forward?
While the reform is seen as highly restrictive and will most likely affect the trading volume in most financial market and the profitability of US banks, its direct impact will not be known until we can get a clearer picture on the details.

What is most worrying is the timing of the proposal which will shroud the market under a cloud of uncertainty all the way through to the US mid-term elections, which is scheduled only in November 2010.

In my personal perspective, this proposal is seen as a declaration of war on Wall Street and is likely to create much volatility and likely persistent weakness in the stock market for the near term. This is clearly evidence at the bloodbath seen over the past few days, which saw funds pulling out the market in a big way.

Frankly, I am not sure which one is better: A weak stock market with a stronger banking sector or a strong stock market with a weaker banking sector. With already a healthcare reform on his shoulder, I am not sure how much President Obama can stomach seeing a recovering market back on its knee....

I have attached here the charts for DJIA, HS and STI.

DJIA has pierced through my expected support around the 10,200 region. I fear more downside here.

HS is near the support line around 20,200 region. I am looking for some momentum rebound (hopefully). Otherwise HS may go further down to 19,500 region.

STI seems to imitate HS by sitting near its support line. I am also looking for some momentum rebound. 2,700 region is still the key support region if this pierce down.

In any case, in such volatile market, always play safe and stay nimble.

God Bless!

This blog is a selections of my investment views to my client. If you find it useful or have additional information to share, please do let me know. These blogs are my personal views and is not meant to solicit any sales or investment on any securities or investment. I may have vested interest in some of the counters or investment products, hence please invest at your own risk. As usual invest in what you understand and do your own homework as usual.