Posted on Thu, Jan. 21, 2010
last updated: March 15, 2013 11:58:06 AM
WASHINGTON _Trying to ride a wave of public anger at Wall Street, President Barack Obama on Thursday proposed tough new restrictions designed to limit the size of the nation's largest commercial banks and reduce the risks they take in complex and exotic investments.
The president stopped short of urging a return to the days when commercial banks just lent money and were locked out of investment activities. However, his proposal Thursday, likely to play well in the heartland, is designed to rein in what are viewed as Wall Street excesses.
Flanked by his economic team, congressional leaders and the towering former Federal Reserve Chairman Paul Volcker, who's long been urging much of what Obama announced, the president took verbal aim at Wall Street, today's political pinata.
"While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse," Obama said before cameras at the White House. "My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary."
Financial markets didn't like what they heard. The Dow Jones Industrial Average cratered more than 224 points as the president concluded his speech. The Dow closed down 213.27 points to 10389.88, its worst showing since Oct. 30.
Wall Street critics welcomed Obama's proposal, however.
"The basic idea ... is a really, really good step," said Dean Baker, a co-director of the Center for Economic and Policy Research, a liberal research center.
It came just days after the Democrats lost a Senate seat in Massachusetts, as Obama strives to assure voters that he's siding with working people rather than the wealthy elite and searches for ways to redirect voters' anger away from him to other foes, such as big bankers.
Americans are angry at bankers and Wall Street, as they get huge bonuses while the rest of the country struggles to hold jobs and recover from the recession.
In a recent CBS poll, a vast majority of Americans — 70 percent — said they were angry or bothered by the bonuses.
Worse, Americans think by 72-19 percent that taxpayer money that bailed out the big banks was used to help Wall Street fat cats rather than homeowners and working people.
In a news briefing ahead of Obama's announcement, senior White House officials said the president's proposals sought to make explicit what was implied in financial regulatory overhaul legislation that already had cleared the House of Representatives.
That legislation, shepherded by House Financial Services Committee Chairman Rep. Barney Frank, D-Mass., would grant regulators broader powers to break apart financial institutions that were deemed so large that their failure would threaten the financial system.
"It's designed to constrain future growth" in the size of these institutions, a senior staffer said, speaking only on the condition of anonymity because the president hadn't yet spoken.
The administration hopes that the new proposal, which Obama called the "Volcker rule," will be added to the Senate's version of the financial regulation bill. The proposal prohibits commercial banks from conducting proprietary trading in securities and other investments. If they invest in stock markets or commodities exchanges on behalf of clients, they wouldn't be allowed to do it for their own benefit, too.
"This proprietary trading issue is a lot more complex than is being presented," warned Douglas Elliott, a former investment banker who's now a financial researcher for the Brookings Institution, a center-left research center.
Many banks invest in securities because they're easier to cash in than loans are if the bank has a quick need for cash. Preventing banks from trading in securities, Elliott said, may make the banks less stable.
The Financial Services Roundtable, the lobby for the financial sector, put out a statement immediately after the president's speech calling it bad policy.
"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.
The administration's proposal also would extend the 10-percent cap on how much of a market share of insured deposits any one bank can have to a wider range of investment activities. This addresses the evolution of the banking sector into activity beyond lending, White House officials said.
Banks also wouldn't be allowed to invest in or own hedge funds or private-equity funds. Hedge funds pool contributions from the very wealthy and institutional investors such as pension funds. Private equity firms also are closed pools of capital, used to purchase companies or invest in exotic financial instruments.
Frank said Thursday on CNBC television that banks must get up to five years to spin off their investments so that they wouldn't be forced to sell them quickly at fire-sale prices.
Still, some analysts worry that banks will just find a way to evade the limits.
"When you put a system of regulation in place, they (Wall Street) figure out ways to get around it. It's an invitation to change corporate structures that may move stuff more off the radar screen," Vincent Reinhart, a former top economist at the Federal Reserve, said of the proposed prohibition on hedge-fund activity by banks.
A wiser approach, he suggested, would be to create stronger firewalls between activities that banks conduct, and impose higher cash-reserve requirements on each part of a bank's business.
"I empathize that the firms are too complicated, markets can't discipline themselves, (firms) can't run themselves, you can't supervise them," said Reinhart, who's now a senior researcher at the American Enterprise Institute, a conservative research center.
However, the administration's approach, he said, amounts to "being on the right side of the mob."
Taking on bankers will be a key part of Obama's political message going into this midterm congressional election year, when the Democrats hope that a tidal wave of voter anger won't cost them their majority control of the House and the Senate.
"I think that's a lot of what 2010 is going to be about," White House Press Secretary Robert Gibbs said Sunday after Obama railed against banks in Massachusetts in a vain effort to stave off defeat for the Democratic U.S. Senate candidate there.
"People are going to have to decide whether the people they have in Washington are on the side of protecting the big banks, whether they're on the side of protecting the big oil companies, whether they're on the side of protecting insurance companies or whether they're on the people's side. I think what he laid out today is what you'll hear him talk a lot about."
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