A Small Step Forward for Investors

Today’s positive vote in the U.S. House of Representatives in favor of a modicum of financial reform is a bright light for investors. But it has a long way to go, especially as the U.S. Senate considers financial reform under the watchful eyes of the powerful financial industry lobby.

While financial reform is overdue, shareholders still must act in their own best interests regardless of the outcome. That’s because market returns going forward will be less than in the last, accompanied by more market volatility, a declining dollar and the prospect that the next generation of Americans will work in a nation which is competing for jobs and resources against emerging, powerful economies, especially India and China.

While the vote is in its early stages, it was certainly propelled by powerful populist forces which arose during the current jobless recovery (the worst jobless recovery ever was under the George Bush administration cycle with job losses continuing through August 2003, about two years after the 2001 recession ended*.)

The current jobless recovery and the failure of the Federal TARP program only underscore today's need for financial reform since it is now evident that financial self-regulation is a failure.

Another power force driving the need for financial reform is the bonuses paid out to executives of the top financial firms which ushered in the current deep recession.

Consider this list of bonuses awarded by firms which paid employees bonuses of at least $1 million or more in 2008:

JP Morgan Chase--1,144 employees;
Goldman Sachs—953 employees:
Citigroup Inc.—738 employees
Merrill Lynch—696 employees
Morgan Stanley—428 employees
Bank of America Corp.—172 employees

All of these bonuses were for work done as the U.S. was clearly entering the deepest financial crisis since the Great Depression; a recession which affected almost all aspects of the capital and real estate markets. It’s also safe to say that all of these firms received or befitted from direct funds in 2009 provided by U.S. taxpayers to keep these financial firms solvent.


*Source: Crunch, Jared Bernstein, Berrett Koehler, 2008