After Franklin Roosevelt took over as president in 1933, he was trying to figure out how to stop the bank runs, the massive unemployment and the barely functioning stock market.
One of his first acts was to get in touch with Joseph Kennedy. Kennedy had made a great deal of money as a rum runner during Prohibition and was laundering that money in the stock market. Oddly enough, Kennedy had exited most of his positions just days before the stock market crash.
Back in those days — though not much has changed since — the “bucket shops” that formed the core of the markets were not really regulated and could easily be manipulated. And Kennedy was the type of man to take advantage of that opportunity.
So, Roosevelt brings Kennedy in and basically propositions him. He offers Joe a job as the first commissioner of the newly minted Securities and Exchange Commission. If Kennedy declined, Roosevelt suggested he may have to investigate how Kennedy got so rich on everyone else’s misfortune.
Kennedy was in charge of the team that built the rules that would make it difficult for people like him to game the markets any longer. There is some value in having the fox teach you how to build a hen house. And the Securities Act of 1933 and 1934, along with the 37-page Glass-Steagall Act, stood until 1999.
Bill Clinton decided to feather his nest as his second term was winding down by supporting the big banks in the dissolution of Glass-Steagall, which had kept a Chinese wall between deposit banks and investment banks.
Deposit banks — banks that made money off depositors, loans and mortgages — were FDIC-insured and could not buy any securities riskier than U.S. Treasuries. Investment banks were investing in more aggressive vehicles like brokerage services, derivatives and underwriting securities.
By 1999, the Washington political hacks were bought and paid for by Wall Street interests and so the fox was let into the hen house once again. This repeal was primarily responsible for the 2008 financial meltdown and the hard road since.
After the crash, Congress in its infinite wisdom decided to re-regulate — a futile and merely symbolic effort that is the monstrosity of the 834-page Dodd-Frank Wall Street Reform and Consumer Protection Act, one of the most ungainly and ridiculous tomes of legislation ever created.
President Trump has promised to do “a big number” on Dodd-Frank. And that would be much appreciated by people who build and run businesses for a living. At least in theory.
Here’s the thing to watch out for in any Dodd-Frank reform. The goal was to try to make big banks and financial institutions have to jump through hoops when they invest, to keep them from adding too much uncovered risk in their portfolios.
Well, the road to Hell is paved with good intentions.
What we ended up with was a classic example of Washington trying to look like it was helping the people while making sure its benefactors were protected. And of course, small businesses and regional banks paid the biggest price.
But now that reform is in the air, it’s time to keep some powder dry for the top regional banks around. They stand to benefit the most (hopefully) if Trump’s “number” is really meant to help average Americans.
Regional banks have already strengthened from the dark days of 2008-09. They’ve been beneficiaries of strengthening local economies and because they usually didn’t have massive derivative trading desks and weren’t highly leveraged, are making money the old-fashioned way — loans and mortgages.
Fifth-Third Bancorp (NASDAQ: FITB) is one great choice if you want to invest in this sector. It operates in the Midwest and Southeast and while it is up 80 percent in the past 12 months, growth may cool after a hot 2016, so if the stock drops, it’s a great long-term choice that you can buy while it’s going lower in the short term.
BB&T Corporation (NYSE: BBT) is located in 15 states, predominantly in the South and Mid Atlantic. It was buying up smaller local banks like crazy before the crash and has continued to build off its strong position in its markets. It’s up 50 percent in the past 12 months and has more room to grow — plus it hasn’t missed a dividend payment since 1903.
FNB Corp (NYSE: FNB) operates in the heart of Trump country — West Virginia, Ohio and Pennsylvania. If Trump focuses on paying back these voters for his victory, then FNB is sure to be a winner. It’s up 25 percent in the past six months and has plenty of headroom left. Plus, it throws off a solid 3 percent dividend.
— GS Early