New Bank Regulations, No Proprietary Trading

Lots of stories below cover banking regulation.  Here is a summary of what we know.

No details have been released.  As the Bloomberg story below says, we don’t even know the definition of “proprietary trading” for these purposes.

Frank’s statement below says:

The President’s initiatives build on provisions that originated in the House Financial Services Committee and were included in the Wall Street Reform and Consumer Protection Act, which passed the House on December 11. By adopting the amendment offered by Rep. Paul Kanjorski, we included provisions in this bill to give the regulators the power to do everything the President has proposed.

If the Wall Street Reform and Consumer Protection Act passes with the Kanjorski amendment as it is currently written, Obama can impose whatever he wants. All he has to do is pick up the phone and tell the regulator to do it or he will find someone to put in that job that will.

Since the bill has already passed the House and it is popular (and includes the “Audit the Federal Reserve” provision), it will be hard to stop.

If Congress wants to use the President’s proposal to have more hearings and open up this bill to rewrites, then we are months away from passage and the final form of the President’s proposals is anybody’s guess.

  • House Committee on Financial Services – Frank Statement on the President’s Financial Reform Proposals
    “I welcome the President’s strong support for additional provisions in the financial reform legislation to address the too big to fail problem. The President’s initiatives build on provisions that originated in the House Financial Services Committee and were included in the Wall Street Reform and Consumer Protection Act, which passed the House on December 11. By adopting the amendment offered by Rep. Paul Kanjorski, we included provisions in this bill to give the regulators the power to do everything the President has proposed. Those measures were very controversial and were unanimously opposed by Committee Republicans. Now, with the President’s strong support, I believe we should be able to overcome this resistance and take the next step. While our bill gave the President’s appointees the power to do everything that his proposal would do, the advantage of doing them legislatively is that a future administration would not be able to ignore or undo them. I also want to note that the powers that we gave them would be at the discretion of the regulators and go beyond those that the President would mandate. This works well because if the regulators think that circumstances require that more should be done then they will have the power to do so. Paul Volcker has long advocated these measures, and I am delighted that the President agrees with him.”
  • BusinessWeek – Simon Johnson:  Obama’s Plan To Be Judged By A Goldman Breakup
    As we drill down into the details of ideas for breaking the economic and political power of oversized banks, we need this litmus test against which serious suggestions should be judged: Does a proposal, at the end of the day, imply that Goldman Sachs should break itself up into at least four or five independent pieces, with the biggest being no more than 1 percent of gross domestic product, or roughly $150 billion? If the answer is yes, we are making progress in moving our financial system back toward where it was in the early 1990s, when it worked fine (and Goldman was a world-class investment bank) and was much less threatening to the global economy. If the answer is no, we are merely repainting — ever so gently — the deckchairs on the Titanic.
  • – Obama Bank-Plan Impact Hinges on How to Define Client Trades
    President Obama’s plan to curb risk- taking by banks hinges on how rigidly regulators define proprietary trading at firms such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. Goldman Sachs, which generated at least 76 percent of 2009 revenue from trading and principal investments, gets the “great majority” of transactions from customers, according to Chief Financial Officer David Viniar. About “10-ish percent” of the New York-based firm’s revenue comes from “walled-off proprietary business that has nothing to do with clients,” he said on a conference call yesterday. The plan to curb proprietary trading at banks is among proposals that Obama said yesterday will strengthen the U.S. financial system and help prevent a repeat of the credit crisis. Other restrictions would prohibit banks from investing in hedge funds and private companies and put new limits on banks’ borrowings, according to the White House. JPMorgan, Goldman Sachs, Citigroup Inc. and Bank of America Corp. tumbled more than 4 percent in New York trading, leading the S&P 500 Financials Index down 3 percent, its biggest decline since October. All the banks are based in New York except for Bank of America, which is in Charlotte, North Carolina.
  • – Rich Miller: Obama Bank Curbs May Not Leave U.S. Financial System Much Safer
    President Barack Obama’s proposal to impose limits on commercial banks may win him support on Main Street and shake up Wall Street without doing much to make the financial system safer overall. The plan, which is still lacking in details and must be approved by Congress, aims to make the banks more secure by forcing them to minimize the trading they do on their own account and give up their stakes in hedge funds and private equity firms. “It’s the right direction,” said Henry Kaufman, president of Henry Kaufman & Co. in New York and a former vice chairman of Salomon Inc. The danger is that such risky activities could simply migrate to big non-bank financial institutions, leaving the system as a whole no better off. Banks also might try to make up for the loss of profits from proprietary trading by lending more to risky borrowers such as real estate developers, threatening the federal safety net, said Martin Baily, a former White House economist now with the Brookings Institution in Washington. “Beware of unintended consequences,” said Robert Litan, vice president of research and policy at the Kansas City-based Kauffman Foundation, a group that promotes entrepreneurship, and a former Clinton administration budget official. “This could have perverse effects on risk-taking.” The proposals highlight the difficulties the administration has faced in dealing with institutions that have grown so big and risky that their failure could rock the financial system. Until that’s resolved, the U.S. will be forced to use taxpayer money to rescue failed firms or risk the same sort of global financial panic that occurred in the wake of Lehman Brothers Holdings Inc.’s collapse in September 2008.

  • The Wall Street Journal – New Bank Rules Sink Stocks
    Obama Proposal Would Restrict Risk-Taking by Biggest Firms as Battle Looms
    Under the Obama proposal, banks that take federally insured deposits or have the right to borrow from the Fed would be prohibited from owning, investing in or sponsoring hedge funds or private-equity firms. “You can choose to engage in proprietary trading, or you can own a bank, but you can’t do both,” an administration official said. The president also called for expanding the reach of a 1994 law that forbids banks from acquiring another bank if the deal would give it more than 10% of the nation’s insured deposits. He would expand that limit to cover other types of funding—such as banks’ short-term borrowing from financial markets—and perhaps put a cap on the share of assets any one firm could hold. The Thursday announcement is the latest move by the White House to target Wall Street and banks. Earlier this month, the president proposed a new fee on large banks and insurance companies that would raise $90 billion over 10 years, ostensibly to offset the costs of the bailout of financial firms and auto giants.
  • The New York Times – Obama’s Move to Limit ‘Reckless Risks’ Has Skeptics
    The president’s proposals to place new limits on the size and activities of big banks rattled the stock market, but banking executives were perplexed as to how his plan would work. Indeed, many insisted the proposals, if adopted, would do little to change their businesses. Moreover, it was unclear if the twin proposals — to ban banks with federally insured deposits from casting risky bets in the markets, and to resist further consolidation in the financial industry — would have done much if anything to forestall the crisis that pushed the economic system to the brink of collapse in 2008.
  • The Financial Times – Lex:  Obama and US banks
    Simple question: how will President Obama’s proposals affect US banks? Unfortunate answer: no one yet knows. The new scheme – which covers a ban on proprietary trading, a ban on ownership, investment in or sponsorship of hedge funds and private equity, and new limits on the overall size of banks – is vague and will doubtless change before it becomes a reality. The detail will make a huge difference. For example, pure proprietary trading – investment by the bank on its own, not clients’ behalf – at JPMorgan Chase contributes well below 1 per cent of revenues. But much client trading involves taking balance sheet positions and then holding them. So when does client work cross the line into prop trading? Determining what constitutes “sponsorship” of a hedge fund will also be crucial. Asset management vehicles that take short positions (and in which some banks invest alongside clients) could be affected. But lending and advisory services, such as prime brokerage and leveraged finance, seemingly will not be.
  • The Wall Street Journal – Obama v. Wall Street
    The President gets serious about moral hazard.
    President Obama and Democrats have settled on demonizing Wall Street as a campaign theme for November’s elections. If history is any guide, Mr. Obama and New York Senator Chuck Schumer will now persuade Wall Street to underwrite this campaign. Ah, the politics of hope and change. How refreshing. Phony populism aside, yesterday Mr. Obama introduced his first serious idea into the debate on reforming the financial system. In calling for an end to proprietary trading at firms with a federal safety net, the President showed that he now understands an important principle: Risk-taking in the capital markets is incompatible with a taxpayer guarantee. Under the President’s still-sketchy plan, firms that hold government-insured deposits or are eligible to receive cheap loans in an emergency from the Federal Reserve would not be able to trade for their own accounts. The firms could facilitate customer orders as brokers have always done and continue to underwrite new issues of stocks and bonds, but they could not make bets with their own capital or own or invest in hedge funds. Yesterday’s announcement is a critical departure from the reform plan Mr. Obama introduced last year—largely incorporated in the House and Senate bills written by Barney Frank and Chris Dodd. Those plans all sought to expand the universe of too-big-to-fail companies eligible for taxpayer rescue. Mr. Obama has at last joined the most important policy discussion: How to eliminate the moral hazard now embedded in the U.S. financial system. Political assaults on banker compensation have done nothing to address this core problem that enables gargantuan bonuses.
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