Obama Takes On Bank Bonuses
WASHINGTON - President Obama sent a sharp message to big banks and their lobbyists Thursday:
Bring it on.
"If these folks want a fight, it's a fight I'm ready to have," the president said, announcing plans to impose limits on how much financial institutions can grow and take risks. The announcement came exactly a week after the administration proposed a $90 billion tax on the country's biggest financial institutions.
The White House, reeling from setbacks in Congress, may be spoiling for a showdown with an unpopular industry that has returned to high profits, big bonuses and risky business a year after being rescued with hundreds of billions of taxpayers' dollars.
"My resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform," Obama said in a press briefing at the White House, "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 (and that) they can't keep credit card rates low."
The White House plan would:
- Ban banks from owning hedge funds and private-equity funds and from "proprietary trading" in financial markets for their own profit; they could trade on behalf of customers.
- Impose limits on any financial institution's market share of liabilities - such as money borrowed in the federal funds or Eurodollar markets. A 1994 law limits banks to 10 percent of banks' share of deposits nationwide. Banks can exceed the deposit cap by attracting new depositors but not by acquiring another bank; it's not clear how the broader liability limit would work.
Obama labeled the plan the "Volcker Rule" after "this tall guy behind me" at the podium - the 6-foot-7 former Federal Reserve chairman Paul Volcker. A revered figure, Volcker had been pushing for months, seemingly in vain, for regulations to prevent banks from making risky bets in financial markets.
"It's important that Paul Volcker was involved," says Simon Johnson, a professor at the Massachusetts Institute of Technology's Sloan School of Management. "He's a force to be reckoned with."
Analysts are still working out what the proposals will mean for specific institutions such as Citigroup and Bank of America. Goldman Sachs Chief Financial Officer David Viniar told analysts Thursday that proprietary trading accounts for about 10 percent of the firm's annual revenue - $4.5 billion of $45.2 billion in 2009 revenue. Macquarie Capital analyst David Trone reckons that proprietary trading accounts for perhaps 3 percent of revenue at most other big banking firms.
Investors weren't waiting around to assess the damage: The Dow Jones industrial average skidded 213 points, or 2 percent.
JPMorgan Chase fell 6.6 percent to $40.54, Bank of America slid 6.2 percent to $15.47, and Goldman Sachs lost 4.1 percent to $160.87 despite announcing a quarterly profit of nearly $5 billion.
Following the money
In recent years, many major Wall Street banks have stepped up proprietary trading as a way of boosting profits. They've bet that their top traders could earn more money by investing in financial markets rather than deploying capital in a traditional way, such as loans to start-ups.
The administration wants to ensure that no client money or federally insured deposits are put at risk via these in-house trades.
Since the government rescued Wall Street with bailout money, loan guarantees and near-zero short-term interest rates, financial firms have been using their access to cheap money to make risky trading bets. J. Kyle Bass, managing partner at asset management firm Hayman Advisors, told a congressional panel last week that some big banks have riskier trading portfolios than they did before Wall Street melted down in the fall of 2008.
Critics see the proposal as a desperate ploy by an administration that suffered a huge political blow Tuesday when Massachusetts elected a Republican to the Senate; that deprived Democrats of the 60 votes they need to overcome a Republican filibuster and pass Obama's health care reform proposal, his No. 1 policy priority.
Banking consultant Bert Ely dismissed the proposal as "just the latest example of an increasingly desperate, politically failing administration, thrashing about trying to do something to rebuild voter support."
"The president has clearly not learned the lesson that was delivered this week: Americans are sick of his big-government solutions," said Rep. Tom Price, R-Ga. "It is folly to believe that Washington can decide what represents the proper amount of risk in the private sector. Markets determine risk, not bureaucrats, and any limits the administration places would be arbitrary ones."
Even some of the president's supporters had reservations. "We have to see the details," says Sen. Maria Cantwell, D-Wash. "There's obviously been legislation sent up to (Capitol) Hill before with loopholes." She says a "simpler, cleaner" solution would be her own proposal to reinstate the Depression-era Glass-Steagall law separating commercial from investment banking.
Banking attorney Ernest Patrikis, a partner at White&Case, expressed doubt that the financial system could go back to the old days, when banks stuck to making loans and left risk-taking to brokerages. "Can you put the genie back in the bottle?" says Patrikis, former general counsel at the Federal Reserve Bank of New York and a friend of Volcker's. "Can you go back to boring banks? The foreign competitors aren't going to be boring."
Supporters dismiss the risk that tougher U.S. regulations would drive business overseas and jeopardize New York's status as the world's financial capital. House Financial Services Committee Chairman Barney Frank, D-Mass., says U.S. officials are coordinating closely with their counterparts abroad to make sure banks can't shop the globe for the loosest regulations.
"We're working together on this," he says, indicating that he'll discuss financial regulation with European officials next week at the World Economic Forum in Davos, Switzerland. "There's no longer a race to the bottom among regulators. There's only a race to the top. . . . There's no place for (banks) to hide."
In the past couple of weeks, Obama has shown a new willingness to take on the powerful banking lobby. Last week, the administration proposed levying at least $90 billion in taxes over 10 years on the liabilities of financial institutions with more than $50 billion in assets. The idea: to recoup bailout funds invested in banks, automakers and troubled insurance giant American International Group.
Thursday's proposals will be added to sweeping financial reform legislation already pending before Congress. The legislation, which has been passed by the House, would bring the mysterious market in over-the-counter derivatives under regulatory scrutiny; establish a process for shutting down failing financial firms without panicking the markets; and create a Consumer Financial Protection Agency to crack down on predatory lending and other financial abuses.
The banking industry has been lobbying furiously to kill or weaken parts of the bill, especially the new consumer agency. The advocacy group Consumer Watchdog reported Thursday that the financial industry had spent $366 million lobbying Congress in the first three quarters of 2009.
The lobbying efforts seemed to be working. Reports surfaced that Senate Banking Committee Chairman Chris Dodd, D-Mass., would consider taking away the consumer agency's independent status and planting it inside an existing federal agency.
Consumer activists say existing regulators failed miserably to stop lenders from peddling toxic mortgages, credit cards with hidden fees and overdraft loans with sky-high interest rates.
"It's a straightforward choice," says Elizabeth Warren, a Harvard University law professor who first proposed the consumer agency in a 2007 article. "We can continue with the status quo, where the banks can do pretty much whatever they want. Or we can write a few rules to level the playing field." Obama met with Dodd Tuesday and pushed for a strong consumer agency: "The president is ready to fight," she says.
MIT's Johnson, co-author of the forthcoming book 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, says taking on the banks is smart policy and smart politics.
He says the American public is fed up with big banks. Obama's proposal could embarrass Republicans who vote against stronger banking regulations.
"We need to smoke them out and get those arguments into the open," says Johnson, former chief economist at the International Monetary Fund. "Who do you know who supports keeping Goldman Sachs and Citigroup and Bank of America in their current form? . . . The reasonable middle has spoken on this."
University of Texas historian H.W. Brands says Obama is borrowing from Franklin Roosevelt's Depression-era playbook: "If he handles it right, it could be very effective politics," says Brands, author of the FDR biography Traitor to His Class. "Many Americans are outraged that Wall Street is raking in the profits again while Main Street languishes, and Wall Street has done it on the taxpayers' nickel. FDR beat up on the 'moneychangers' and the 'economic royalists' to great effect.
"FDR employed the anger of the public to get Glass-Steagall and (the Federal Deposit Insurance Corporation), which together kept the financial system together for nearly seventy years."