Brokers and industry observers worry that the Department of the Treasury's capital purchase program to inject $250 billion into the financial services industry could mark a new era of government control and mistrust of the industry.
"It looks like the whole financial sector is being taken over," said a broker in the Northeast for Merrill Lynch & Co. Inc. of New York, who asked not to be identified.
"The Federal Reserve can come in and [threaten] to 'Wachovize' you, or 'IndyMac' you, because you're not playing along" with demands to raise more capital, said a rep in the Northwest for Wachovia Securities LLC of St. Louis, referring to the government's role in forcing the firm's parent, Wachovia Corp. of Charlotte, N.C., to sell itself and the July seizure by regulators of Pasadena, Calif.-based IndyMac Bank FSB. This rep also asked not to be identified.
The capital purchase plan is "one indicator of substantial government intervention in the marketplace," said Dale Brown, executive director of the Financial Services Institute Inc. in Atlanta, which represents independent-contractor firms.
He doesn't expect FSI member firms to be directly affected by the program.
TOP PRIORITY
But "where does this road end?" Mr. Brown asked.
Regulatory reform will be the top priority under a new administration and in Congress, he said. "We anticipate more intrusion, not less."
"We've taken the position that banks need to feel free to participate [in the capital purchase program], knowing that there are restrictions on the level of government involvement in their institutions," said Peter Garuccio, spokesman for the American Bankers Association in Washington.
A spokesman for the Securities Industry and Financial Markets Association of New York and Washington did not return calls for comment. However, in a statement last week, SIFMA said it supported the capital purchase program. Under the Treasury Department plan, the government could end up getting significant common stock ownership in the big brokers and banks.
Treasury Secretary Henry Paulson said last week that the U.S. was "not looking to come in and take meaningful ownership percentages." Included in the department's plan are some limits on executive compensation and corporate governance standards.
Mr. Garuccio said the ABA "really didn't take issue with that ... We discussed some of the finer points [with government officials] but we certainly didn't oppose [pay limits]."
Despite concerns about the government's ultimate role, few questioned the need for regulators to act.
"If there is anything that will bring some confidence back, it's this [Treasury program]," said a Smith Barney rep in the South who asked not to be identified.
Smith Barney is the brokerage unit of Citigroup Inc. of New York.
"It was a good sign that [industry chief executives] signed on" last week to the program, this broker added. "They all took their medicine like big men."
Many observers and analysts say that injecting capital into the industry makes more sense than simply removing troubled assets.
SIFMA, though, continues to support government purchase of troubled assets. In addition to the capital purchase program, SIFMA last week said that the industry also needed price discovery for the frozen assets that remain on balance sheets. "Until we have an idea what these assets are worth, loans will remain hard to come by," the Wall Street trade group said.
But with the Treasury moving toward recapitalization as its first effort, "Wall Street [firms] this time [didn't] get what they wanted," the Smith Barney rep said.
"They got us into this trouble," the broker added. "If [the industry] doesn't like [taking government money], tough."
In pondering the government's role, people have to realize that "this is the anti-capitalist movement now taking over," said a Merrill broker in the Southeast who asked not to be identified. "It's very much comparable to the '60s and '70s" when the public held a negative opinion of business.
"You just need to figure out how to capitalize on this cycle," he said. This broker expects another bout of inflation to emerge. He said having clients exposed to commodity markets is one way to protect them.
E-mail Dan Jamieson at [email protected].
