Obama lays down new rules: Stricter limits to risk-taking, cap in bank sizes, more

[yllus]

Not much to comment about, just the news. I'd like to hear what our industry insiders think.

Wall Street reels over plan to ban prop trading

WASHINGTON -- President Barack Obama proposed stricter limits on financial institutions' risk-taking Thursday in a new populist-tinged move that sent bank shares tumbling and aimed to shore up the president's political base.

Mr. Obama, a Democrat who is just starting his second year in office, laid out rules to prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.

He also called for a new cap on the size of banks in relation to the overall financial sector that would take into account not only bank deposits, which are already capped, but also liabilities and other non-deposit funding sources.

"We should no longer allow banks to stray too far from their central mission of serving their customers," Mr. Obama told reporters, flanked by his top economic advisors and lawmakers.

"Too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward."

The rules, which must be agreed by Congress, would also bar institutions from proprietary trading operations, unrelated to serving customers, for their own profit.

Proprietary trading involves a firm making bets on financial markets with its 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 also increase market volatility.

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

Mr. Obama's move is the latest in a series to crack down on banks and comes as he reels from a devastating political loss for his Democratic Party in Massachusetts on Tuesday, when a Republican captured a U.S. senate seat formerly held by the late Democratic senator Edward Kennedy.

Bank shares slid and the dollar fell against other currencies after Mr. Obama's announcement.

JPMorgan Chase & Co fell 5.8%, helping push the Dow Jones Industrial average lower.

Citigroup Inc fell 6.36% and Bank of America Corp fell 7% while Goldman was down 5.5% despite posting strong earnings Thursday.

"This is going to have a tremendous impact on big-name brokerage firms like Goldman Sachs and JPMorgan," said Ralph Fogel, investment strategist at Fogel Neale Partners in New York.

"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."

Mr. Obama targeted banks for taking big risks while assuming taxpayers would bail them out if they failed.

"When banks benefit from the safety net that taxpayers provide, which includes lower-cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit," Mr. Obama said.

"That is especially true when this kind of trading often puts banks in direct conflict with their customers' interests," he said.

Before the announcement, Mr. 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 approved a sweeping financial regulation reform bill on Dec. 11.

The House bill contains a provision that empowers regulators to restrict proprietary trading by financial firms subjected to stricter oversight because they are judged to pose a risk to the stability of the financial system.

The Senate has not yet acted on the matter, but the Senate Banking Committee continues to seek bipartisan agreement on financial regulation reform.

 

[Craig234]

It's a good thing, the question is how close it is to what it should be.

 

[GTKeeper]

I think the message here is simple....

If you take in deposits, you can't use them to 'trade the market'. Since the deposits are FDIC insured you technically have an auto backstop. Its essentially trying to reinstate the Glass Stegal Act which SHOULD be done.

Nassim Taleb talks about this all the time, take risks with your own money not my money. There is nothing wrong with hedge funds making huge bets and blowing up. After all they use their clients money for the purposes of proprietary trading. Banks are supposed to be 'boring' taking in deposits and making loans, not trading the deposits away.

 

[Dari]

A year into his term and he comes up with this crap? Not to mention how much the bought lawmakers on Capital Hill will dilute this further with their lobbyists egging them on. Color me unimpressed. A one-term president for sure.

 

[cubeless]

wow... another tough, eloquent speech... i feel much better now that he said something about this...

 

[PokerGuy]

Yet another set of measures that, as presented by the dear leader, will never see the light of day. It would kill liquidity in several markets and mess up so many established structures and mechanisms that it simply isn't feasible. This is just the dear leader putting on a show to his base of lefties that he's cracking down on banks.

 

[Blackjack200]

I'd like to see what LegendKiller thinks about this. He seems to have most understanding of the banking industry.

 

[sciwizam]

I'll wait till all the loopholes and exemptions are added to form an opinion.

 

[StageLeft]

Sounds good.

But really get back to me when some real, tough measures are actually taken. Until then my sig stays the same.

 

[StageLeft]

mess up so many established structures and mechanisms

We can hope so. that is, after all, the point.

 

[cubeless]

Yet another set of measures that, as presented by the dear leader, will never see the light of day. It would kill liquidity in several markets and mess up so many established structures and mechanisms that it simply isn't feasible. This is just the dear leader putting on a show to his base of lefties that he's cracking down on banks.

we will now see bo twisting like a windmill with the polls on what 'independents' are supposed to care about... he's given up on the lefties, they wouldn't even go vote when he made a personal appearance... and he's going to really go into a depression once he finds out that his amazing speechifying has lost its effect... even the pundits that felt a tingle in their leg at his earlier recitations are starting to break ranks...

 

[shiner]

we will now see bo twisting like a windmill with the polls on what 'independents' are supposed to care about... he's given up on the lefties, they wouldn't even go vote when he made a personal appearance...

So basically he's Clinton 2

If he can keep his pants zipped around chubby girls in blue dresses then we will probably be ok.

 

[yllus]

A year into his term and he comes up with this crap? Not to mention how much the bought lawmakers on Capital Hill will dilute this further with their lobbyists egging them on. Color me unimpressed. A one-term president for sure.

Can you expand on what about this you consider "crap"?

 

[ayabe]

Can you expand on what about this you consider "crap"?

Obama = bad even if he's doing something good, that kind of "crap"

Trying to go any deeper than that with him will exhaust you, I'd recommend against it.

 

[ayabe]

Yet another set of measures that, as presented by the dear leader, will never see the light of day. It would kill liquidity in several markets and mess up so many established structures and mechanisms that it simply isn't feasible. This is just the dear leader putting on a show to his base of lefties that he's cracking down on banks.

Just so we all understand, you fully embrace Too Big To Fail and believe it's a critical component of our economy.

 

[Dari]

Can you expand on what about this you consider "crap"?

He's targeting a specific action by the banks and felt compelled to have a news event about this...a couple of days after his party lost a major election. The biggest problems with the financial system has nothing to do with the bankers. They did nothing illegal. The problems lie at the central bank and the various regulatory regimes. Instead of making those stronger and more independent the president decides to take a cheap swipe at the banks. IMHO, the government needs to set clear rules for the financial industry and enforce them blindly...no loopholes, no exceptions. Also, the Federal Reserve's mandate needs to be simplified and the regulatory regimes need to be able to do their jobs without interference.

 

[cubeless]

So basically he's Clinton 2

If he can keep his pants zipped around chubby girls in blue dresses then we will probably be ok.

nope, he needs an ongoing scandal... he's going to keep saying stuff that causes problems unless he has something to make him want to hide out...

 

[StageLeft]

The biggest problems with the financial system has nothing to do with the bankers. They did nothing illegal.

Since when did legal mean it was not damaging? That's the point of a new law, to make something now illegal that before was not but should be.

 

[cliftonite]

He's targeting a specific action by the banks and felt compelled to have a news event about this...a couple of days after his party lost a major election. The biggest problems with the financial system has nothing to do with the bankers. They did nothing illegal. The problems lie at the central bank and the various regulatory regimes. Instead of making those stronger and more independent the president decides to take a cheap swipe at the banks. IMHO, the government needs to set clear rules for the financial industry and enforce them blindly...no loopholes, no exceptions. Also, the Federal Reserve's mandate needs to be simplified and the regulatory regimes need to be able to do their jobs without interference.

You really think this was in response to the Brown victory? Something like this can be brought up over night without some planning?

 

[Blackjack200]

You really think this was in response to the Brown victory? Something like this can be brought up over night without some planning?

That wouldn't surprise me in the least. Things like this can sit on the presidents desk for weeks or months, and brought to the forefront at an opportune time.

Things like this are always timed.

 

[Dari]

Since when did legal mean it was not damaging? That's the point of a new law, to make something now illegal that before was not but should be.

I honestly believe that the record profit that Wall Street is making is spurring anger and resentment amongst the the population and Obama wants to tap into that anger. Even if this proposal is passed unmolested, which is doubtful, you don't think banks will find ways around this? If they can't, you don't think New York State will put massive pressure on the president to relax these rules to prevent the banks from going to places like Singapore?

You really think this was in response to the Brown victory? Something like this can be brought up over night without some planning?

Volcker has been one of the level-headed people in Administration with regards to bank regulations. However, look at his official title. Although it means little I doubt it stopped him from making sensible proposals. After Massachusetts, the president looked at him for some ideas. However, IMHO, there needs to be a wholesale look at the government side of the equation, rather than simply focusing on the banks' massive profits.

 

[Hacp]

No more regulations. There is a simple way to get rid excessive risk taking. Require banks to be privatley owned. Take away their corporate charters. Then, banks will not dare take excess risk.

 

[CitizenKain]

No more regulations. There is a simple way to get rid excessive risk taking. Require banks to be privatley owned. Take away their corporate charters. Then, banks will not dare take excess risk.

Hahahahahahahahaahahahah

When you get out of school and stop mooching off your parents, the real world is going to be such a shock to you.

 

[ahurtt]

So basically he's Clinton 2

If he can keep his pants zipped around chubby girls in blue dresses then we will probably be ok.

a chubby girl in a blue dress was actually a step up for Clinton. If Obama can do better than Michelle though. . .well more power to him.

 

[drebo]

Wasn't the banking bubble created precisely because the government agreed to financially back so many of the banks' behaviors anyway? Risk taking wouldn't have been an issue if there was actually any risk to begin with...but when the fedgov is giving loans at 0% interest and guaranteeing them, of course banks are going to make more risky investments.