Washington: President Barack Obama unveiled plans Thursday to limit the size and scope of US banks and financial firms in a new offensive against Wall Street excesses laid bare by the financial crisis.
“Never again will the American taxpayer be held hostage by a bank that is too big to fail,” vowed Obama, flanked by former Federal Reserve chief Paul Volcker who advised the president on the rules.
The plans aim to limit “excessive” risk taking and to “protect” taxpayers by preventing banks or financial institutions from owning, investing in or sponsoring hedge fund or private equity funds.
They will effectively force financial firms to choose between proprietary activities -- trading in stocks and sometimes risky financial instruments for their own benefit -- and traditional activities, like making loans and collecting deposits.
The initiative, which must be approved by Congress, includes a new proposal to limit the consolidation of the finance sector, placing broader limits on “excessive growth of the market share of liabilities” at the largest financial firms.
Obama blamed banks for sparking the worst economic crisis since the Great Depression with “huge reckless risks in pursuit of quick profits and massive bonuses” in a “binge of irresponsibility.”
“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,” the president said.
He vowed to enact the reforms in Congress, even if Wall Street deployed an army of lobbyists to kill them.
“If these folks want a fight, it’s a fight I’m ready to have,” he vowed defiantly.
The announcement was the latest attempt by the White House to harness public rage at Wall Street bonuses and the financial crisis.
Wall Street gave an immediate thumbs down to Obama’s plans as US stocks plunged, with the blue-chip Dow Jones Industrial Average down more than 200 points or 2%.
The news also sent shockwaves though Asian stock markets on Friday, with the region’s financial centers suffering heavy losses.
Tokyo’s Nikkei dived 2.56%, Hong Kong was 2.54% down by the break and Singapore was 1.60% lower.
David Easthope, analyst with Celent, a research and consulting firm, said the effort could hit the banks in one of their most profitable areas.
Proprietary trading “has been the sweet spot for leading investment banks over the last few years, and executives will be concerned that Washington will be taking away the frosting,” he said.
The Financial Services Roundtable, which represents 100 of the largest integrated financial firms, said the proposal would do little to improve risk management or protect consumers from irresponsible loans and trades.
“The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs,” said Steve Bartlett, president and chief executive for the Roundtable.
The group represents 100 top financial services firms providing banking, insurance, and investment products and services.
Obama’s first year in office was dominated by efforts to rescue a handful of banks that threatened to topple the US economy after being exposed to massive losses on the subprime mortgage market.
According to Treasury officials, about $20500 billion was pumped into 707 banks under the government rescue plans.
Obama has sounded a tougher tone towards banks in recent weeks as he faced widespread voter anger at the massive government bailout, which came as Americans faced surging unemployment, home foreclosures and national debt.
Top Obama economic aide Austan Goolsbee sought to counter criticism that the plan is returning to the Depression-era law creating a wall between investment and commercial banks.
“It’s not returning to Glass-Steagall,” Goolsbee said.
While the act repealed in 1999 forbid underwriting securities or investing in securities by any commercial bank, Goolsbee said, “This is not that. This says a bank cannot own a hedge fund, cannot own a private equity fund or do trading for its own account that is not related to its client business.”
He added that the goal is “to get back to the fundamental nature of the bank, which is serving its clients, rather than investing for its own profit.”