Obama fights banks

“If these folks want a fight, it’s a fight I’m ready to have,” he told
reporters at the White House, flanked by his top economic advisers and
lawmakers.

“We should no longer allow banks to stray too far from their central mission of serving their customers,” he said.

The
proposals, which need congressional approval, would prevent banks or
financial institutions that own banks from investing in, owning or
sponsoring a hedge fund or private equity fund.

They also
would set a new limit on banks’ size in relation to the overall
financial sector that would take into account deposits – which are
already capped – as well as liabilities and other non-deposit funding
sources.

Sources said Treasury Secretary Timothy Geithner had
hesitations about the proposals, concerned that good economic policy
was being sacrificed for politics. But a White House official said the
plan had the unanimous backing of Obama’s economic team.

Geithner
told the PBS programme “NewsHour” it is not in the national interest to
allow the financial industry to keep conducting business as usual.

“Our
financial system today is still operating under the same rules that
helped create this crisis. And we need to move with Congress to change
that system,” he said.

Proprietary trading operations
The
proposed rules also would bar institutions from proprietary trading
operations, unrelated to serving customers, for their own profit.

Proprietary
trading involves firms making bets on financial markets with their own
money rather than executing a trade for a client. These expert trading
operations, which can bet on stocks and other financial instruments to
rise or fall, have been enormously profitable for the banks but can
hold huge risks for the financial system if the bets go wrong.

The White House blames the practice for helping to nearly bring down the US financial system in 2008.

The White House said it wants to coordinate with international allies in its implementation of the measures.

Big financial institutions criticised Obama’s move.

“Trading,
proprietary or otherwise, did not lead to the financial crisis,” said
Rob Nichols, president of the Financial Services Forum, a lobbying
group for CEOs of firms such as Goldman Sachs and JPMorgan Chase.

He
said the government should be focused on better risk management,
corporate governance and other forms of regulatory oversight, “rather
than arbitrarily banning certain activities, or setting arbitrary size
limits.”

Obama’s move is the latest in a series to crack down
on banks and follows a devastating political loss for his party in
Massachusetts on Tuesday, when a Republican captured a US Senate seat
formerly held by the late Democratic Senator Edward Kennedy,
potentially imperiling his domestic agenda.

Bank shares slid
and the dollar fell against other currencies after Obama’s
announcement. JPMorgan fell 6.59 percent, helping push the Dow Jones
Industrial average down two percent.

Citigroup Inc fell 5.49
percent and Bank of America Corp fell 6.19 percent while Goldman
dropped 4.12 percent despite posting strong earnings on Thursday.

Ralph
Fogel, investment strategist at Fogel Neale Partners in New York, said
the move would have a major impact on big-name brokerage firms like
Goldman Sachs and JPMorgan.

“If they stop prop trading, it
will not only dry up liquidity in the market, but it will change the
whole structure of Wall Street, of the whole trading community,” he
said.

Underscoring the high level of public anger at banks, a
majority of 1,006 Americans surveyed in a Thomson Reuters/Ipsos poll
said executive pay was too high.

White House economic adviser
Austan Goolsbee said the proposals were not designed to be punitive. He
said they aimed to end the concept that some banks were “too big to
fail” and to show that when such firms “mess up, they die.”

Before
his announcement, Obama met with Paul Volcker, the former Federal
Reserve chairman who heads his economic recovery advisory board and who
favors putting curbs on big financial firms to limit their ability to
do harm.

The House of Representatives approved a sweeping
financial regulation reform bill on Decemeber 11 that included a
provision that would empower regulators to restrict proprietary
trading. The Senate has not yet acted on the matter.