(Buried within this article about the attitude of the financial
community toward Obama's new found "populism" is this: "The
Buckingham Research Group estimated that the new rules would
reduce revenue at Citigroup, Bank of America and JPMorgan Chase by
less than 3 percent. Goldman Sachs, which typically derives a
tenth of its revenue from such trading, said it would be able to
contend with the new rules."
NY Times, January 22, 2010
Obama’s Move to Limit ‘Reckless Risks’ Has Skeptics
By SEWELL CHAN and ERIC DASH
WASHINGTON — President Obama wants to cut down to size those
too-big-to-fail banks. But his vow on Thursday to rewrite the
rules of Wall Street left many questions unanswered, including the
big one: Would this really prevent another financial crisis?
The president’s proposals to place new limits on the size and
activities of big banks rattled the stock market, but banking
executives were perplexed as to how his plan would work. Indeed,
many insisted the proposals, if adopted, would do little to change
their businesses.
Moreover, it was unclear if the twin proposals — to ban banks with
federally insured deposits from casting risky bets in the markets,
and to resist further consolidation in the financial industry —
would have done much if anything to forestall the crisis that
pushed the economic system to the brink of collapse in 2008.
Mr. Obama appeared to be leaving crucial details to be hashed out
by Congress, where partisan tussling has already threatened
another reform the president supports — the creation of a consumer
protection agency that would have oversight over credit cards,
mortgages and other lending products.
Wall Street figures, many caught off guard by the news, reacted
cautiously.
“I am somewhat skeptical about how much the federal government can
actually regulate,” said John C. Bogle, the founder of Vanguard,
the mutual fund giant. “We need to try, but all the lawyers and
geniuses on Wall Street are going to figure out ways to get around
everything.”
Indeed, Mr. Obama acknowledged that “an army of industry
lobbyists” had already descended on Capitol Hill, but vowed, “If
these folks want a fight, it’s a fight I’m ready to have.”
Shares of big banks — potentially the biggest losers should the
proposals be enacted — fell sharply, dragging the broader market
down by about 2 percent. Even as the markets stumbled, Mr. Obama —
still stinging from the Democrats’ loss on Tuesday of the
Massachusetts seat formerly held by Senator Edward M. Kennedy —
ramped up his populist approach, one week after he proposed a new
tax on large financial institutions to recoup projected losses
from the 2008 bailout.
Mr. Obama said the banks had nearly wrecked the economy by taking
“huge, reckless risks in pursuit of quick profits and massive
bonuses.”
The administration wants to ban bank holding companies from
owning, investing in or sponsoring hedge funds or private equity
funds and from engaging in proprietary trading, or trading on
their own accounts, as opposed to the money of their customers.
Mr. Obama called the ban the Volcker Rule, in recognition of the
former Federal Reserve chairman, Paul A. Volcker, who has
championed the proposal. Big losses by banks in the trading of
financial securities, especially mortgage-backed assets,
precipitated the credit crisis in 2008 and the federal bailout.
It was not clear, however, how proprietary trading activities
would be defined.
Officials said that banks would not be permitted to use their own
capital for “trading unrelated to serving customers.” Such a
restriction would most likely compel banks that own hedge funds
and private equity funds to dispose of them over time. Officials
said, however, that executing trades on a client’s behalf and
using bank capital to make a market or to hedge a client’s risk
would be permissible.
Federal regulators have already leaned hard on banks to curb pure
proprietary trading, and the banks expect that regulators will
demand more capital if they keep making risky bets, making the
practice far less profitable.
Some of the biggest firms, applying a narrow definition, say that
pure proprietary trading constituted less than 10 percent of their
revenue, and in some cases far less. Morgan Stanley, for example,
already abandoned all but two proprietary trading desks last year.
The Buckingham Research Group estimated that the new rules would
reduce revenue at Citigroup, Bank of America and JPMorgan Chase by
less than 3 percent. Goldman Sachs, which typically derives a
tenth of its revenue from such trading, said it would be able to
contend with the new rules.
“I would say pure walled-off proprietary-trading businesses at
Goldman Sachs are not very big in the context of the firm,” David
A. Viniar, the firm’s chief financial officer, said in a
conference call.
Mr. Obama also is seeking to limit consolidation in the financial
sector, by placing curbs on the market share of liabilities at the
largest firms. Since 1994, the share of insured deposits that can
be held by any one bank has been capped at 10 percent.
The administration wants to expand that cap to include all
liabilities, to limit the concentration of too much risk in any
single bank. Officials said the measure would prevent banks at or
near the threshold from making acquisitions but would not require
them to shrink their business or stop growing on their own.
The Obama administration said the new proposals were in the
“spirit of Glass-Steagall” — a reference to the Depression-era law
that separated commercial and investment banking, which was
repealed in 1999.
Economists have debated whether the repeal of that act contributed
to the crisis. The two big investment banks that imploded, Bear
Stearns and Lehman Brothers, were not commercial banks, and
Goldman Sachs and Morgan Stanley converted to bank holding
companies only after the system started to come unglued.
The industry was left buzzing with questions about timing and
scope. Officials said the new restrictions would apply to overseas
firms, like Barclays and UBS, with large American operations, but
it was not clear how — or whether — foreign governments would go
along. Officials also said the proposal called for a “reasonable
transition period” for firms to comply with the rules, but the
timetable was not specified.
Timothy F. Geithner, the Treasury secretary, and Lawrence H.
Summers, the president’s chief economic adviser, developed the
proposals at the request of the president and worked closely with
Mr. Volcker, according to White House officials. The plan was
completed over the holidays and submitted to the president with a
unanimous recommendation from the economic team.
While Mr. Geithner and Mr. Summers debated concerns that
proprietary trading was not at the heart of the recent crisis,
they concluded that reforms needed to address potential sources of
risk in the future.
Reaction on Capitol Hill also was muted, partly because neither
party wanted to be seen as beholden to unpopular banks. The House
bill passed last month would consolidate oversight, require
stronger capital cushions for the largest banks and impose
regulation of some derivatives. In many ways, the new White House
proposal amplifies provisions in that bill that would have left
regulators discretion over proprietary trading and excessive
liability.
Sewell Chan reported from Washington, and Eric Dash from New York.
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