Obama threatens fight with banks on new risk rules

By Jeff Mason and Kevin Drawbaugh Jeff Mason And Kevin Drawbaugh – Thu Jan 21, 6:07 pm ET
WASHINGTON (Reuters) – U.S. President Barack Obama threatened to fight Wall Street banks on Thursday with a new proposal to limit financial risk taking, sending stocks and the dollar tumbling.
Obama, a Democrat who is struggling to advance his agenda after a key election loss this week, laid out rules to restrict some banks' most lucrative operations, which he blamed for helping to cause the financial crisis.
"If these folks want a fight, it's a fight I'm ready to have," Obama 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.
Financial 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.
"We should no longer allow banks to stray too far from their central mission of serving their customers," Obama said.
After a mixed first year as president, Obama took a tough, populist-tinged stance aimed at revving up his political base by exploiting anger over Wall Street excess.
The proposals, which require 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 would also 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.
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 U.S. financial system in 2008.
The White House said it wants to coordinate with international allies in its implementation of the measures.
POPULIST MOVE HITS SHARES
Big financial institutions criticized 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 U.S. 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 2 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 December 11 that included a provision that would empower regulators to restrict proprietary trading. The Senate has not yet acted on the matter.
Obama proposes tough limits on largest banks
Washington Post Staff Writer Friday, January 22, 2010
President Obama expanded his new offensive on Wall Street on Thursday, proposing rules that would impede the growth of the largest banks and bar them from making what he called "reckless" investments.
The proposal comes as the administration is shifting from its year-long effort to save financial firms toward a new willingness to confront them with explicit prohibitions on activities that fueled the economic crisis. In essence, Obama is now aiming to force the firms to choose between the federal benefits that come with being a bank and the unbridled pursuit of profits.
After opposing proposals such as hard limits on executive bonuses, the administration is embracing a tougher line -- more evidence that Obama has the industry in his sights as he seeks to show Middle America that he feels its economic pain.
Obama's plan would bar banks from making investments that are not intended to benefit customers, including the creation of proprietary investment funds solely to benefit employees and shareholders. New limits also would make it difficult for the largest banks to become any bigger, effectively stopping domestic expansion at well-known companies such as Bank of America and J.P. Morgan Chase.
While the proposed restrictions are narrower than the now-defunct law that segregated Wall Street trading from commercial banking for much of the 20th century, they share a similar goal: to subsidize banking -- which the administration considers vital to the economy -- without having taxpayers subsidize highly speculative activity.
Flanked by the members of his economic team in the Diplomatic Reception Room of White House, Obama chastised the chief executives of the nation's largest financial firms for sending what he called an "army of industry lobbyists" to fight his efforts to reform the banking sector.
"My message to leaders in the financial industry is to work with us, not against us," the president said. "If these folks want a fight, it's a fight I am ready to have."
Wall Street responds
Wall Street has responded to the administration's increased hostility with its own change in temperature. Bankers howled last week when Obama proposed a fee on big banks to recoup losses from the government's $700 billion program to bail out financial firms. Several executives said Thursday that they regretted their support for -- and campaign donations to -- Obama.
"I wish I could take my vote back," said one executive at a large bank. He spoke on the condition of anonymity because his firm barred public comments on the matter.
As the industry seeks to defeat proposals to rein in banks, companies may now be free to spend more money on political campaigns after a Supreme Court decision Thursday reversed some key restrictions on political advertising by big businesses. Unless Congress acts quickly to reassert these limits, banks and other financial firms will be allowed to support congressional candidates who oppose Obama's bank proposals.
Bank stocks fell Thursday as investors reacted to the president's proposal. Goldman Sachs shares fell 4 percent in trading on the New York Stock Exchange. Citigroup dropped 5.5 percent, Bank of America fell 6 percent, and J.P. Morgan Chase dropped 7 percent.
The proposal is part of the White House's election-year strategy to repair damage done to Obama's image during his first months in office, when he helped bail out the banking industry, senior advisers said. The president's top political aides are hoping to set the stage for a sharp contrast with Republicans, who have historically opposed government prescriptions for private businesses.
"He had to help Wall Street in order to save Main Street," a top Obama adviser said, describing the White House's message for the midterm congressional elections. "Every time we announce an economic policy that Wall Street does not like, the Republicans are standing right there with Wall Street, defending them."
Republicans offered a muted response to the president's proposal, suggesting they recognize the political dangers of siding with big banks when there is a 10 percent unemployment rate, depressed housing prices and increased voter anger.
The White House wants Congress to incorporate the proposals into the sprawling financial reform legislation that passed the House. Rep. Barney Frank (D-Mass.) and Sen. Christopher J. Dodd (D-Conn.), who are overseeing the legislation in their respective chambers, stood with the president as he spoke and then issued statements of support. Frank noted that the House bill gave regulators the discretion to impose similar requirements, but he expressed support for stronger language mandating that regulators take action.
Rebounding banks
White House advisers said the president has become more aggressive in recent weeks as it became clear that the big banks that received large amounts of government aid to stay afloat a year ago had rocketed back to profitability by making the same kind of risky investments that had gotten them in trouble.
Obama's announcement came as Goldman Sachs reported blockbuster earnings of $13.4 billion for 2009, the largest annual profit in the company's history. The firm sharply reduced the share of revenue devoted to bonuses but still pledged to pay an average of $498,000 per employee -- up 37 percent from 2008.
"When I see soaring profits and obscene bonuses . . . it's exactly this kind of irresponsibility that makes clear reform is necessary," Obama said.
Several industry representatives said they were concerned by the president's increasingly stern language, saying that the issues at stake are complicated and deserve to be discussed.
"There is a lot of concern in the banking industry, and by that I mean all banks, about the turn in the tone of the debate," said Edward L. Yingling, president of the American Bankers Association.
Obama officials said they did not discuss the new proposal with the industry before the president's remarks, a break with how the administration has announced its previous financial reform proposals. Treasury Secretary Timothy F. Geithner had dinner Wednesday night with several bank executives, but did not mention the president's plans. The executives learned about the proposal as early news reports about the proposal began appearing via e-mail shortly after the meal.
Staff writers David Cho and Brady Dennis in Washington and Tomoeh Murakami Tse in New York contributed to this report.
Obama seeks tighter limits on banks' reach
‘If these folks want a fight, it's a fight I'm ready to have,’ president says
WASHINGTON - President Barack Obama stepped up his campaign against Wall Street on Thursday with a far-reaching proposal for tougher regulation of the biggest banks.
"We have to get this done," Obama said at the White House. "If these folks want a fight, it's a fight I'm ready to have."
The stock market reacted by dropping more than 200 points by midday as shares in Bank of America, Citigroup Inc. and JPMorgan Chase & Co. each fell by more than 5 percent.
It was a stern, populist lecture from the president to Wall Street for what he perceives as its abandonment of Main Street. Obama said the government should have the power to limit the size and complexity of large financial institutions as well as their ability to make high-risk trades.
He said it wasn't appropriate that banks have been able to run these trading operations with the protections afforded to regular banking services.
"We have to enact commonsense reforms that will protect American taxpayers and the American economy from future crises," Obama said. "For, 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."
Joining Obama for the announcement were former Federal Reserve Chairman Paul Volcker, who heads the president's Economic Recovery Advisory Board, and William Donaldson, chairman of the Securities and Exchange Commission under President George W. Bush. Volcker and Donaldson have advocated stronger restrictions on banks.
Overhauling financial rules is the one issue on Obama's legislative agenda that appears still alive after Democrats' devastating loss Tuesday in the Massachusetts Senate race. The White House is renewing Obama's demand for an independent consumer financial protection agency as part of any overhaul. That's one of the major sticking points in the Senate; the House has passed its version already.
The new proposal from Obama intends to limit speculation by commercial banks and to keep financial institutions from growing so big that they pose a risk to the economic system.
"When you see more and more of the financial sector basically churning transactions and engaging in reckless speculation and obscuring underlying risks in a way that makes a few people obscene amounts of money but doesn't add value to the economy — and in fact puts the entire economy at enormous risk — then something's got to change," Obama said in an interview released Thursday by Time magazine.
'Fat cats' Obama has branded bank executives as "fat cats" and proposed a fee on large banks to cover shortfalls in the government's $700 billion financial rescue fund.
Expanding on earlier measures, Obama endorsed Volcker's proposal to restrict proprietary trading by commercial banks. That would separate commercial banks from investment banks, a line blurred a decade ago by the repeal of the Depression-era Glass-Steagall Act.
This restriction would affect some of the biggest banks,
including Bank of America Corp., Goldman Sachs and Citigroup Inc.
"The better answer is to modernize the regulatory framework and not take the industry and the economy back to the 1930s," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry group that represents large Wall Street institutions.
Goldman Sachs Group Inc. said Thursday it earned $4.79 billion in the fourth quarter as its trading business again outdistanced the rest of the industry. The company rewarded its employees with $16.2 billion in salaries and bonuses for 2009, 47 percent more than the previous year but still lower than many had expected.
There was a new urgency in the Senate to respond to the voter anger at Wall Street and bank bailouts that helped propel Republican Scott Brown to victory in Massachusetts for the seat long held by Democratic Sen. Edward M. Kennedy, who died in August.
Brown's victory gave Republicans 41 votes, enough to mount successful filibusters and prevent Democratic legislation on health care or climate change from getting final votes.
But financial regulations could survive.
Administration officials believe that while Republicans may seek to block other aspects of the president's agenda, Senate GOP leader Mitch McConnell of Kentucky is considering making financial regulations an exception.