Finally capitulating to voter outrage, and the very kind of “Change” he campaigned on last year, President Obama proposed tough new financial industry restrictions under what he called “the Volcker Rule” – named after Paul Volcker, the former Fed Chair. Volcker, along with Austin Goolsbee, a member of the President’s Council of Economic Advisers, have been for the last year the Administration’s fiercest advocate for stronger financial regulatory reforms. Volcker has been particularly aggressive on the issue of “too big to fail” financial institutions, as well as the high-risk, casino-like proprietary trading operations at the big banks that nearly destroyed the financial system. In adopting this new tougher stand, Mr. Obama appears to have set aside a ‘soft touch’ approach to financial regulatory reform that had been championed by his economic team, led by Treasury Secretary Timothy F. Geithner and White House National Economic Council Director, Lawrence Summers. The Geithner-Summers axis appears to have been benched in exchange for the emergent Volker-Goolsbee axis.
In rolling out his new, more aggressive, tough talk approach to Wall Street, the president added, “We have to get this done,” and “If these folks want a fight, it’s a fight I’m ready to have.” It was a stern, populist lecture from the president to Wall Street for what he perceives as its abandonment of Main Street. Obama said the government should have the power to limit the size and complexity of large financial institutions as well as their ability to make high-risk trades. He said it wasn’t appropriate that banks have been able to run these trading operations with the protections afforded to regular banking services. Among other strong language, the president branded bank executives as “fat cats” and proposed a fee on large banks to cover shortfalls in the government’s $700 billion taxpayer bailout fund. Expanding on earlier measures, Obama endorsed Volcker’s proposal to restrict risky proprietary trading by commercial banks that is often in direct conflict with customer interests to the bank’s benefit. The new measures would also separate commercial banks from investment banks, a line blurred a decade ago by the Republican-led Congress’ repeal of the Depression-era Glass-Steagall Act.
Obama also proposed addressing one of the clearest issues leading to the financial crisis of the past years, namely banks that stray wildly from their core mission of serving the interests of their customers. Having met with Paul Volcker this morning, and having last week proposed new fees on Wall Street to ensure the taxpayers get their money back, the President came with a direct message for banks that might object to these changes strongly criticizing the powerful financial industry lobby, saying “But what we’ve seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and common-sense rules of the road that would protect our economy and the American people. So if these folks want a fight, it’s a fight I’m ready to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can’t lend more to small business, they can’t keep credit card rates low, they can’t pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers — that’s the claims they’re making. It’s exactly this kind of irresponsibility that makes clear reform is necessary.
The President went on to explain the reforms he was proposing in more detail saying, among other things:
First, we should no longer allow banks to stray too far from their central mission of serving their customers. In recent years, 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. And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks.
Our government provides deposit insurance and other safeguards and guarantees to firms that operate banks. We do so because a stable and reliable banking system promotes sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression.
But these privileges were not created to bestow banks operating hedge funds or private equity funds with an unfair advantage. 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. And that is especially true when this kind of trading often puts banks in direct conflict with their customers’ interests.
The fact is, these kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong. We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses. Read more from the White House fact sheet.
Source: www.WhiteHouse.gov
