Obama’s bank reform slammed by The Financial Services Roundtable, SIFMA

Jan 21, 2010 @ 8:37 am

By Sara Hansard

As part of his plan to limit the size of banks, President Barack Obama today proposed prohibiting financial institutions that own banks from investing in or advising hedge funds or private-equity funds.

“We intend to close loopholes that allowed big financial firms to trade risky financial products like credit default swaps and other derivatives without oversight,” Mr. Obama said in announcing the plan, which was immediately criticized by financial services industry groups and Republican lawmakers.

The administration proposed the two new reforms, which are in addition to changes put forward in June 2009, to move banks “more to identifying their core business as being something like serving their clients,” an administration official said on a background basis at a telephone press briefing.

Congress is currently working on the regulatory-reform proposals the administration made last year. The House on Dec. 11 approved its version of the financial-reform measures.

The administration’s proposal would substantially crimp the kinds of activities in which banks could engage. Regulators would be required to prevent commercial banks from owning, investing in or advising hedge funds or private-equity funds. Moreover, the president wants to limit the proprietary trading that they do for their own accounts that is not related to the clients’ interests.

The government provides deposit insurance and other safeguards and guarantees to firms that operate banks, the president said in explaining his plan. "But these privileges were not created to bestow banks operating hedge funds or private-equity funds with an unfair advantage," he said. "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."

Groups representing the financial services industry slammed the administration’s proposal.

The plan is inconsistent with achieving the goals of promoting responsible lending, increasing jobs and promoting a stronger economy, Steve Bartlett, president and chief executive of The Financial Services Roundtable, said in a release. “The proposal will restrict lending, increase risk, decrease stability in the system and limit our ability to help create jobs,” he said.

The Securities Industry and Financial Markets Association also criticized the administration’s plan. In a statement, SIFMA president and chief executive Tim Ryan said the best way to achieve the goals of ending “too big to fail” and protecting against systemic risk “is to [establish] a tough, competent and accountable systemic-risk regulator.” Mr. Ryan added that “providing for strengthened regulatory oversight and flexibility like that originally proposed by the administration, as opposed to arbitrary restrictions on growth and activities, is a more effective way of mitigating systemic risk ending ‘too big to fail.’”

Senate Banking Committee Chairman Christopher Dodd, D-Conn., issued a statement supporting the changes. “The financial crisis highlighted the dangers of excessive risk taking by financial institutions,” he said. “I agree with President Obama that taxpayers should not be underwriting these risky activities.”

But Rep. Spencer Bachus, R-Ala., the ranking member of the House Financial Services Committee, said in a statement that the problems being targeted by the president would be better addressed by legislation proposed by Republicans. “The Republican plan would end the bailouts, get the government out of picking winners and losers, and restore market discipline,” he said.

Financial firms could continue to make markets, since that would be a service for customers, said one administration official speaking at the background press briefing.

The official denied that the changes would constitute returning to regulations in effect for many years under the Depression-era Glass-Steagall Act, which was repealed in 1999. “We’re not returning to Glass-Steagall,” the official said. “This is about making sure that firms that own banks aren’t doing trading for their own account, not for the benefit of their customer, and benefiting from taxpayer subsidies due to deposit insurance and the discount-window access.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Mar 13

Conference

WOMEN to WATCH

InvestmentNews is honoring female financial advisers and industry executives who are distinguished leaders at their firms. These women have advanced the business of providing advice through their passion, creativity, inclusive approach and... Learn more

Featured video

INTV

When can advisers expect an SEC fiduciary rule proposal and other regs this year?

Managing editor Christina Nelson and senior reporter Mark Schoeff Jr. discuss regulations of consequence to financial advisers in 2018, and their likely timing.

Recommended Video

Path to growth

Latest news & opinion

Bond investors have more to worry about than a government shutdown

Inflation worries, international rates pushing Treasuries yields higher.

Morgan Stanley reports a loss of advisers after exiting the protocol for broker recruiting

The firm said it lost 47 brokers in the fourth quarter, the most in any quarter of 2017.

Morgan Stanley's wealth management fees climb to all-time high

Improvement reflect firm's shift of more clients into fee-based accounts priced on asset levels, which boosts results as markets rise.

Legislation would make it harder for investors to sue mutual funds over high fees

A plaintiff would have to state in their initial complaint why fiduciary duty was breached, and then prove the violation with 'clear and convincing evidence.'

Relying on trainees, Merrill Lynch boosts adviser headcount in 2017

Questions remain about long-term effectiveness of wirehouse's move away from recruiting experienced brokers.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print