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Thursday, 21 January 2010

Obama Calls for Limiting Size, Risk-Taking of Financial Firms

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President Barack Obama, tapping into voter anger over bank bailouts, called for limits on the size and trading activities of financial institutions in order to reduce risk-taking and prevent another financial crisis.

The proposals, to be added to an overhaul of regulations being considered by Congress, would prohibit banks from running proprietary trading operations solely for their own profit and sponsoring hedge funds and private equity funds. He also proposes expanding a 10 percent market-share cap on deposits to include other liabilities such as non-deposit funding to restrict growth and consolidation.

“While the financial system is far stronger today than it was one year ago, it’s still operating under the same rules that led to its near collapse,” Obama said yesterday at the White House after meeting with former Federal Reserve Chairman Paul Volcker, who has been an advocate of taking such steps. “Never again will the American taxpayer be held hostage by a bank that is too big to fail.”

The proposals could affect trading at some of the nation’s largest banks, including New York-based Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co., according to Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

Market Reactions

Goldman, JP Morgan, Citigroup Inc., and Charlotte, North Carolina-based Bank of America Corp., lost more than 4 percent in New York trading yesterday, leading the S&P 500 Financials Index to a 3 percent slide, the biggest decline since October. Credit-default swaps tied to Goldman and Morgan Stanley rose.


The proposals to take a harder line bring to a conclusion an debate within the administration on how far to go in regulating the nation’s financial institutions, a person familiar with the discussions said.

Advocates of a less aggressive approach included Treasury Secretary Timothy Geithner and National Economic Council director Lawrence Summers, the person said. Those favoring the plan pulled together over the last 10 days included White House economic adviser Austan Goolsbee and Volcker, who leads Obama’s outside panel of economic advisers.



The harder-line also echoes themes from Obama’s presidential campaign and is intended to provide a clearer distinction between Obama and his Republican opposition, the person said.

Victory for Volcker

It represents a victory for Volcker, 82, a staunch advocate of prohibiting banks from engaging in proprietary trading solely for their own profit and for stronger regulations on the financial industry.

Volcker initially had trouble getting traction for his views within the administration. He visited nine cities in five countries between October and mid-December of 2009 as he advocated changes.

Obama signed onto the concept in mid-December, according to a White House aide. Volcker attended a White House meeting Dec. 23 with Geithner and Summers to discuss details. Prior to the meeting, Obama had already approved of separating proprietary trading and banking. Geithner and Summers expressed concern that this would be a diversion from other regulatory proposals, the aide said.

Republicans called Obama’s proposal a maneuver to regain political momentum after an important Senate loss in Massachusetts earlier in the week.

‘Villain’

“If something is good policy, it’s good policy, but this administration seems to want to mix politics in everything,” Jon Kyl of Arizona, the No. 2 Republican in the Senate, said in an interview. “Because they just suffered a major defeat, they have to find a villain.”

Republican Scott Brown’s victory in the Massachusetts Senate race deprives Obama of the supermajority he needs to push health-care legislation through Congress.

The financial industry gives Obama an issue on which he can take the offensive with elections that will determine the makeup of Congress in November. Polls show voters are concerned about the economy, taxpayer bailouts and growing bank profits at a time of 10 percent unemployment and a federal deficit that rose to $1.4 trillion last year.

“He clearly recognizes the populist anger brewing out in the country,” said Dan Schnur, a Republican political strategist who is head of the Jesse Unruh Institute of Politics at the University of Southern California in Los Angeles. “So he’s trying to redirect that anger from Washington to Wall Street.”

‘Impractical’

Financial industry executives were critical of the plan.

David Viniar, Goldman’s chief financial officer, called the proposals “impractical” and said they harken back to the Depression-era Glass-Steagall Act. That law, repealed in 1999, required the separation of institutions involved in capital markets from those engaged primarily in consumer banking.

“You have global institutions around the world who are set up in a certain way and to put rules in place that roll back the financial system by 10 years I think is going to be a very, very hard thing to do,” he said in a conference call with reporters.

Obama said his proposal would close loopholes that allow big financial firms to trade products like credit-default swaps without oversight while benefiting from Federal Reserve lending programs and taxpayer insurance of consumer deposits.

“When banks benefit from the safety net that taxpayers provide,” Obama said, “it is not appropriate for them to turn around and use that cheap money to trade for profit.”
source: bloomberg-Nicholas Johnston and Julianna Goldman
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