January 22nd, 2010 10:55 AM by Lehel S.
Reporting from Washington - Taking aim at what he called Wall Street's "huge, reckless risks in pursuit of quick profits and massive bonuses," President Obama today proposed the toughest new restrictions yet on the nation's largest banks in the aftermath of the financial crisis.Obama's plan seeks to reconstruct a barrier similar to that erected during the Great Depression, but repealed in 1999, to limit the risks that banks could take with depositors' money.The proposal also would restrict the future growth of large banks so none could have too large a share of the U.S. financial system."We simply cannot accept a system in which hedge funds or private-equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest," Obama said in a brief White House speech, flanked by his top economic advisors and key congressional committee chairmen."And we cannot accept a system in which shareholders make money on these operations if a bank wins, but taxpayers foot the bill if a bank loses," he said.Obama essentially is proposing a return to the Glass-Steagall restrictions enacted after the market crash that triggered the Great Depression. That law separated commercial banks and investment banks. Congress repealed those restrictions 11 years ago, opening an era in which bank holding companies could own not only institutions that accepted customer deposits but also Wall Street investment firms."Banks will no longer be allowed to own, invest or sponsor hedge funds, private-equity funds or proprietary trading operations for their own profit, unrelated to serving their customers," Obama said."If financial firms want to trade for profit, that's something they're free to do. Indeed, doing so responsibly is a good thing for the markets and the economy," he said. "But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people."Obama said banks have an unfair advantage over other investment firms because the government helps insure their deposits and the Federal Reserve gives them access to low-interest loans through its discount window."When banks benefit from the safety net that taxpayers provide, which includes lower-cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit," he said. "And that is especially true when this kind of trading often puts banks in direct conflict with their customers' interests."Some leading economists, led by former Federal Reserve Chairman Paul Volcker, one of Obama's advisors, have been calling for months for a reinstatement of those restrictions. Obama did not include the restrictions in the comprehensive financial regulatory overhaul he proposed last summer. But the administration has been taking a tougher stance on banks this year. The new proposals were designed with input from Volcker, who stood next to Obama for today's announcement. Obama said he was calling the new restriction "the Volcker rule."The move, which would require congressional action, would affect large, regulated bank holding companies that also do investment banking. Those include Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co. and Bank of America Corp.All of them received government bailouts during the financial crisis. But industry executives have noted that none of the major firms that failed or were acquired as they teetered near collapse during the crisis -- including Bear Stearns Cos., Lehman Bros., American International Group Inc., Merrill Lynch & Co., Fannie Mae, Freddie Mac -- was a bank holding company that would have been constrained by the restrictions on investment and commercial banking.Goldman and Morgan Stanley were only investment banks until the financial crisis when they became regulated banks to protect themselves from the market turmoil. If the new rules were to be enacted, those companies could decide they don't need the complications and give up their bank status. Other banks, such as JPMorgan Chase and Bank of America, with large traditional banking operations, would find such a move difficult.Obama's proposals build on a component of the major overhaul of financial regulations passed by the House late last year that would give regulators the ability to break up large financial firms whose collapse would pose a risk to the economy even if they are not on the brink of failure.Obama's plan also would seek to limit the future growth of large institutions, adding to an existing prohibition on any firm holding more than 10% of the insured bank deposits in the nation. The administration wants regulators to impose a new cap on funds other than deposits and a firm's liabilities. The specifics of such a cap would have to be worked out by regulators, but administration officials said they were not designed to reduce the market share of any existing firm, but rather "to constrain future growth that leads to excessive concentration."The prospects for passing Obama's newest proposals in Congress are unclear.Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and House Financial Services Committee Chairman Barney Frank (D-Mass.) joined Obama for the announcement. And bills were introduced last month in the House and the Senate to restore the Depression-era restrictions. The Senate bill was co-sponsored by Sens. Maria Cantwell (D-Wash.) and John McCain (R-Ariz.), indicating some bipartisan support.But other Republicans slammed Obama's proposal today.Rep. Scott Garrett (R-N.J.) issued the following response to the Obama Administration's proposal to place restrictions on banks:"This renewed focus on financial services reform by the Obama administration is clearly a transparent attempt at faux populism, in light of the outcome of the Massachusetts Senate race. At best, the evidence is mixed that banks that were also engaged in trading were the cause of this crisis."In fact, stand-alone investment banks were two of the most notable failures of the recent crisis, while some of the larger banking institutions were able to provide a measure of stability to the system in the heat of the crisis by purchasing some of their weaker counterparts."The Financial Services Roundtable, which represents large financial institutions, called the proposal counterproductive"The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs," said Steve Bartlett, the group's president.Obama's speech today came after he proposed a new tax last week on the 50 largest financial institutions to recoup projected losses in the $700-billion bailout fund. And it reflects increasingly tough talk from the president regarding Wall Street executives, whom he derided as "fat-cat bankers" late last year while average Americans continue to struggle.Obama said he was willing to work with the industry to structure the new rules. But he warned them against trying to block the proposals and the broader regulatory overhaul."If these folks want a fight, it's a fight I'm ready to have," Obama said."And my resolve is only strengthened when I see a return to old practices in some of the very firms fighting reform, when I see soaring profits and obscene bonuses at some of the very firms claiming that they can't lend more to small businesses, they can't keep credit-card rates low, they can't pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers."