Banks face revolutionary reform

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Barack Obama wanted a regulatory reform bill on his desk by the end of last year. It did not happen.

Rather than wait impatiently on the sidelines, the president on Thursday came up with new restrictions on Wall Street. which will further delay a bill – and add to the lobbying frenzy that surrounds it.

In a surprise move, Mr Obama adopted the ideas of Paul Volcker, the former Fed chairman, including a prohibition on commercial banks trading purely for their own account and a ban on owning hedge funds and private equity firms.

Tim Geithner, Treasury secretary, who is facing increased hostility from Democrats for not adopting punitive measures against Wall Street, had not taken up Mr Volcker’s proposals but did not fight the president’s decision.

Officials said banks would have to choose between owning an insured depository on one hand and owning proprietary trading operations or stakes in hedge funds and private equity firms on the other. They would, however, be able to continue proprietary trading related to their customers’ businesses.

Amid continuing uncertainty over the detail of the reforms, bank executives said they believed they could continue to own hedge funds as long as they did not invest their own funds.

Congress members on both sides of the aisle declined to commit to the Obama plan in interviews with the Financial Times. But Judd Gregg, a Republican member of the Senate banking committee, and Jack Reed, a Democratic counterpart, both said they had been attracted to Mr Volcker’s ideas during private meetings and were interested in considering them.

“This problem has not just been too big to fail, it’s been too big to manage,” said Mr Reed. “A lot of these organisations – they have the core of a bank but that is overwhelmed by very sophisticated subsidiaries and trading programmes.”

Mr Gregg said he was “willing to listen”. “I’m a little concerned that this, however, is less about financial reform and more about the politics of the day and an attempt to get a populist message going and use the banks as a whipping boy, which I don’t think is constructive.”

Rob Nichols, president of the Financial Services Forum, which represents leading institutions in Washington, said: “Trading, proprietary or otherwise, did not lead to the financial crisis.”

Although aides sought to distance the proposals from the Democratic defeat in Massachusetts, Mr Obama was spoiling for a fight on Thursday as he announced his second crackdown on Wall Street in two weeks following last week’s $90bn levy.

“I welcome constructive input from folks in the financial sector. 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,” he said.

Mr Volcker has intellectual clout and political capital in Congress, which will be needed as the administration tries to gather support for its new proposals. Ironically, it was the Treasury and the White House – where Mr Volcker heads an economic advisory board – that had given his ideas the cold shoulder.

One man who had supported Mr Volcker and pushed a version of his plan through the House is Paul Kanjorski, a Democratic member of the House financial services committee, who passed an amendment allowing regulators to force a sale of a risky division.

Thursday’s move by Mr Obama removes the regulators’ leeway and Mr Kanjorski celebrated the toughened approach to what he called the “super core” of the industry’s problems.

But officials struggled to explain the link between this plan and the financial crisis. Senior Treasury officials have long argued that the crisis had very little to do with own-account gambling by banks with insured deposits. Many of the institutions that got into trouble were not traditional commercial banks.

Sceptics, including within the administration, said it would prove hard to put an end to the kind of own-account activities Mr Obama wants to stop without also impeding client-based in-vestment banking he wants them to continue.

Moreover, there is apparently nothing in the proposal to stop former investment banks such as Goldman Sachs and Morgan Stanley simply giving up their newly acquired banking charters and reverting to being non-banks.

Additional reporting by Francesco Guerrera in New York

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