Thu Jan 21, 2010
Obama to target excessive financial risk-taking
WASHINGTON - President Barack Obama, reeling from an election defeat in the U.S. Senate, will propose stricter limits on financial risk-taking on Thursday in a move that may recall Depression-era curbs on banks.
The president will announce a series of measures to cut down on excessive risk-taking as part of a revamp of the country's financial regulatory system, a senior Obama official said on Wednesday.
The move could also help the White House tap into public rage over Wall Street excess after Obama's Democratic Party was rebuffed by voters in Massachusetts, who elected Republican Scott Brown to the U.S. senate.
"The proposal will include size and complexity limits specifically on proprietary trading and the White House will work closely with the House and Senate to work this into legislation," the official said.
Proprietary trading refers to a firm making bets on financial markets with its own money, rather than executing a trade for a client.
The White House has blamed the practice for reckless gambling on the U.S. property market which resulted in massive losses that almost destroyed the financial system in 2008.
This forced taxpayers to provide a $700 billion bank bailout to prevent the most severe U.S. recession since the 1930s from getting even worse.
REINSTATING 1930's LIMITS
The Obama official did not provide details of the plan, which would require congressional approval. But U.S. lawmakers are already reviewing measures that, in some cases, recall the scope of financial reform enacted after the Great Depression.
Democratic Senator Jeff Merkley told reporters earlier this week that there should be a firewall to separate risky trading activities and normal bank-lending.
A more aggressive proposal was put forth last month by former Republican presidential nominee John McCain and Democratic Senator Maria Cantwell. Their measure would reinstate the 1930s-era Glass-Steagall limits on banking by barring large banks from affiliating with securities firms and being in the insurance business.
Passage of the Cantwell-McCain bill would force firms at the center of last year's financial crisis -- such as Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase and Wells Fargo -- to rethink their banking, investment and insurance operations.
Obama will speak at 11:40 a.m. EST (1640 GMT) following a meeting with Paul Volcker, the former Federal Reserve chairman who heads his economic recovery advisory board and who favors curbing big financial firms to limit their ability to do harm.
Obama separately told ABC News in an interview that the surprise defeat of his Democratic Party candidate in Massachusetts on Tuesday reflected anger over bankers' bailouts and double-digit unemployment.
Obama has already unveiled a plan to tax banks up to $117 billion over the next 10 years to recoup money taxpayers lost in the bank bailout conceived by his predecessor, former President George W. Bush, to stem the financial crisis.
Obama is picking on a popular enemy. Ordinary Americans, facing 10 percent unemployment as the economy recovers from the recession inflicted by the financial market collapse, have been enraged by reports of multimillion-dollar banker bonuses.
Goldman Sachs is expected to report strong earnings on Thursday. Critics argue that such large profits -- and similarly large bonus payouts -- are only possible because of public support of financial institutions.
______________________
Obama to target excessive financial risk-taking
WASHINGTON - President Barack Obama, reeling from an election defeat in the U.S. Senate, will propose stricter limits on financial risk-taking on Thursday in a move that may recall Depression-era curbs on banks.
The president will announce a series of measures to cut down on excessive risk-taking as part of a revamp of the country's financial regulatory system, a senior Obama official said on Wednesday.
The move could also help the White House tap into public rage over Wall Street excess after Obama's Democratic Party was rebuffed by voters in Massachusetts, who elected Republican Scott Brown to the U.S. senate.
"The proposal will include size and complexity limits specifically on proprietary trading and the White House will work closely with the House and Senate to work this into legislation," the official said.
Proprietary trading refers to a firm making bets on financial markets with its own money, rather than executing a trade for a client.
The White House has blamed the practice for reckless gambling on the U.S. property market which resulted in massive losses that almost destroyed the financial system in 2008.
This forced taxpayers to provide a $700 billion bank bailout to prevent the most severe U.S. recession since the 1930s from getting even worse.
REINSTATING 1930's LIMITS
The Obama official did not provide details of the plan, which would require congressional approval. But U.S. lawmakers are already reviewing measures that, in some cases, recall the scope of financial reform enacted after the Great Depression.
Democratic Senator Jeff Merkley told reporters earlier this week that there should be a firewall to separate risky trading activities and normal bank-lending.
A more aggressive proposal was put forth last month by former Republican presidential nominee John McCain and Democratic Senator Maria Cantwell. Their measure would reinstate the 1930s-era Glass-Steagall limits on banking by barring large banks from affiliating with securities firms and being in the insurance business.
Passage of the Cantwell-McCain bill would force firms at the center of last year's financial crisis -- such as Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase and Wells Fargo -- to rethink their banking, investment and insurance operations.
Obama will speak at 11:40 a.m. EST (1640 GMT) following a meeting with Paul Volcker, the former Federal Reserve chairman who heads his economic recovery advisory board and who favors curbing big financial firms to limit their ability to do harm.
Obama separately told ABC News in an interview that the surprise defeat of his Democratic Party candidate in Massachusetts on Tuesday reflected anger over bankers' bailouts and double-digit unemployment.
Obama has already unveiled a plan to tax banks up to $117 billion over the next 10 years to recoup money taxpayers lost in the bank bailout conceived by his predecessor, former President George W. Bush, to stem the financial crisis.
Obama is picking on a popular enemy. Ordinary Americans, facing 10 percent unemployment as the economy recovers from the recession inflicted by the financial market collapse, have been enraged by reports of multimillion-dollar banker bonuses.
Goldman Sachs is expected to report strong earnings on Thursday. Critics argue that such large profits -- and similarly large bonus payouts -- are only possible because of public support of financial institutions.
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What is the Glass–Steagall Act?
The Banking Act of 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control speculation[1]. It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Carter Glass and Henry B. Steagall.
Some provisions of the Act, such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act.[2][3]
Two separate United States laws are known as the Glass–Steagall Act. Both bills were sponsored by Democratic Senator Carter Glass of Lynchburg, Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency.
The first Glass-Steagall Act of 1932 was enacted in an effort to stop deflation and expanded the Federal Reserve's ability to offer rediscounts[clarification needed] on more types of assets such as government bonds as well as commercial paper[4].
The second Glass–Steagall Act (the Banking Act of 1933) was a reaction to the collapse of a large portion of the American commercial banking system in early 1933. It introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Corporation for insuring bank deposits. Literature in economics usually refers to this simply as the Glass–Steagall Act, since it had a stronger impact on US banking regulation.[5]
"Rediscount" is a way of providing financing to a bank or other financial institution. Especially in the 1800s and early 1900s banks made loans to their customers by "discounting" the customer's note. The note is a paper document, in a specified form, where the borrower promises to repay a certain amount at a specified date. One example assumes that the customer wants to borrow $1000. The bank may ask him to sign a note promising to repay $1100 in one year. The bank is "discounting" the note by paying less than the $1100 face amount. The extra $100, of course, is the bank's compensation for paying before the note matures. The Federal Reserve System could provide financing by "rediscounting" this note, or would probably give the bank $1050 for the note.
Although Republican President Herbert Hoover had lost reelection in November 1932 to Democratic Governor Franklin D. Roosevelt of New York, the administration did not change hands until March 1933. The lame-duck Hoover Administration and the incoming Roosevelt Administration could not, or would not, coordinate actions to stop the run on banks affiliated with the Henry Ford family that began in Detroit, Michigan, in January 1933[citation needed]. Federal Reserve chairman Eugene Meyer was equally ineffectual.
While many economic historians attribute the collapse to the economic problems which followed the Stock Market Crash of 1929, some economists attribute the collapse to gold-backed currency withdrawals by foreigners who had lost confidence in the dollar and by domestic depositors who feared that the United States would go off the gold standard,[6] which it did when Roosevelt signed Executive Order 6102, The Gold Confiscation Act of April 5, 1933.[7]
According to a summary by the Congressional Research Service of the Library of Congress:
In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.[8]
The Act has influenced the financial systems of other areas such as China, which maintains a separation between commercial banking and the securities industries.[9][10] In the aftermath of the financial panic of 2008–9, support for maintaining China's separation of investment and commercial banking remains strong.[11]
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