Obama Moves to Limit ‘Reckless Risks’ of Big Banks
WASHINGTON — Declaring that huge banks had nearly brought down the economy by taking “huge, reckless risks in pursuit of quick profits and massive bonuses,” President Obama on Thursday proposed legislation to limit the scope and size of large financial institutions.
The changes would prohibit bank holding companies from owning, investing, or sponsoring hedge fund or private equity funds and from engaging in proprietary trading — what Mr. Obama called the Volcker Rule, in recognition of the former Federal Reserve chairman, Paul A. Volcker, who has championed the restriction.
In addition, Mr. Obama will seek to limit consolidation in the financial sector, by placing curbs on the growth of the market share of liabilities at the biggest firms. An existing cap, put in place in 1994, put a limit of 10 percent on the share of insured deposits that can be held by any one bank. That cap would be expanded, officials said, to include liabilities other than deposits.
Both changes require legislation by Congress, and Republican leaders, as well as the banking industry, signaled on Thursday that they would resist the proposals.
Mr. Obama, speaking in the Diplomatic Reception Room at the White House, said he anticipated such opposition, saying an “army of industry lobbyists” had already descended on the capital to oppose regulatory reform.
“If these folks want a fight, it’s a fight I’m ready to have,” he said.
With his comments, the president, for the first time, threw his weight behind an approach long championed by Mr. Volcker, who flew to Washington for the announcement. Mr. Volcker’s chief goal has been to prohibit proprietary trading of financial securities, including mortgage-backed securities, by commercial banks using deposits in their commercial banking sectors. Big losses in the trading of those securities precipitated the credit crisis in 2008 and the federal bailout.
Mr. Obama was flanked Thursday by Mr. Volcker; William H. Donaldson, a former chairman of the Securities and Exchange Commission; Barney Frank, the chairman of the House Financial Services committee; and Christopher J. Dodd, the chairman of the Senate Banking Committee.
The principal obstacle to Mr. Obama’s proposals may come from the Senate Republicans. Even before the White House announcement, the Senate minority leader, Mitch McConnell of Kentucky, had scheduled a meeting with the Republicans on the Senate Banking Committee, a contingent led by Senator Richard C. Shelby of Alabama.
Even so, other Republicans on Thursday were restrained in their response to the Obama proposal, suggesting that they did not want to be perceived as defending the bailed-out banks.
Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said that his party had already put forward a plan last July to “end the bailouts, get the government out of picking winners and losers and restore market discipline.” That approach would address the “uncertainties created by repeated government interventions and ever changing policies,” Mr. Bachus said.
The president — still stinging from a stunning setback on Tuesday, when Republicans captured the Senate seat formerly held by the late Edward M. Kennedy of Massachusetts — took a populist posture on Thursday in criticizing the banks for bringing on the crisis and necessitating hundreds of billions of dollars in government assistance.
Taxpayers were “forced to rescue financial firms facing a crisis largely of their own creation,” he said.
Mr. Obama said of the Troubled Asset Relief Program, the 2008 bank bailout: “That rescue, undertaken by the previous administration, was deeply offensive, but it was the necessary thing to do.” But he said the financial system was “still operating under the same rules that led to its near-collapse,” and vowed: “Never again will the American taxpayer be held hostage by a bank that is too big to fail.”
Under existing rules, he said, the banks “concealed their exposure to debt” through complex financial maneuvers, made “speculative investments,” and took on “risks so vast that they posed threats to the entire system,” Mr. Obama said.
Investors, nervous about the impact the proposed rules could have, sent bank shares down on Wall Street, even with the record earnings reported Thursday by Goldman Sachs.
In late morning trading, Morgan Stanley fell 5.45 percent, to $28.93; JPMorgan Chase dropped 5.2 percent, to $41.16; Bank of America. 5.52 percent, to $15.58; Goldman Sachs 4.6 percent, to $160.19; and Citigroup 3.8 percent, to $3.32.
Wells Fargo, a consumer banking giant that lacks a big trading unit, fell 1.5 percent, to $27.41.
Administration officials played down any suggestion that the proposals were a reaction to the president’s falling approval ratings and popular anger over the huge profits newly announced by giants like Goldman Sachs and JPMorgan Chase.
The proposals, they said, have been brewing since last summer, and partly arose out of meetings of the president’s Economic Recovery Advisory Board, a panel Mr. Obama created last February.
Mr. Volcker, who is the board’s chairman, and Austan Goolsbee, who was Mr. Obama’s economic adviser during the 2008 campaign and is the board’s chief economist, emerged as advocates of the new restrictions, and worked to persuade crucial administration officials, including Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, the director of the National Economic Council.
The proposals go farther than a package of reforms approved by the House last month on a vote of 223-202. That overhaul would consolidate some oversight, require stronger capital cushions for the largest banks and Wall Street firms and impose regulation of some derivatives. It would also require financial institutions to pay as much as $150 billion into an emergency fund that could be tapped when a giant firm needs to be taken over and dissolved. And it would create a Consumer Financial Protection Agency to regulate products like credit cards and mortgages.
Bank executives appeared to be caught off-guard by the proposal, and were still digesting its impact. More than 40 chief executives of the largest financial institutions were scheduled to hear from Mr. Geithner on Tuesday at a closed-door forum of the Financial Services Roundtable.
The executives found themselves stewing over all types of thorny questions. How will the administration define risky activities? Where will it draw the line between trading that bank executes for itself, and trading that is done on behalf of its clients? And how exactly will the proposed changes be put in place?
Some in the industry quickly moved to mobilize their lobbying forces against the proposal.
“It will reduce liquidity and increase risk,” said Scott E. Talbott, the chief lobbyist for the Financials Services Roundtable, which represents dozens of large lenders and insurance companies. “That is the direct opposite of the goals we want to achieve.”
Mr. Dodd, who would be responsible for shepherding the measures through his committee, reacted cautiously. He said he agreed with Mr. Obama that taxpayers should not be underwriting “excessive risk-taking,” and added: “Companies that choose to take such risks should do so on their own dime and not in a way that threatens the stability of our economy.”
But he would only commit to studying the proposal and to “give it careful consideration as the committee moves forward on financial reform.”
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