President Obama threatened to fight Wall Street banks on Thursday with new proposals to limit financial risk taking, sending stocks and the dollar tumbling.
“If these folks want a fight, it's a fight I'm ready to have,” he 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.
The proposals, which need 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 also would 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.
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.
Geithner told the PBS programme “NewsHour” it is not in the national interest to allow the financial industry to keep conducting business as usual.
“Our financial system today is still operating under the same rules that helped create this crisis. And we need to move with Congress to change that system,” he said.
Proprietary trading operations
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 US financial system in 2008.
The White House said it wants to coordinate with international allies in its implementation of the measures.
Big financial institutions criticised 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 US 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 two 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 Decemeber 11 that included a provision that would empower regulators to restrict proprietary trading. The Senate has not yet acted on the matter.