Obama Hits Wall Street Again

President Obama escalated his war on Wall Street today, proposing new limits on the size of banks and their trading activities.

Under the proposal, large financial firms could not increase their national market share of assets other than insured deposits beyond a certain point, similar to the 10 percent market-share cap already in place for insured deposits.

The idea is to prevent a few firms from dominating the financial system. This limit, in addition to other financial regulatory reforms being considered by Congress, would protect taxpayers from having to bail out “too big to fail” financial firms in the future, senior administration officials said.

“The American people will not be served by a financial system that comprises just a few massive firms,” Obama said. “That’s not good for consumers; it’s not good for the economy.”

Obama also wants to prevent financial institutions that own a bank from also owning, investing in, or sponsoring a hedge fund, private equity fund, or proprietary trading operations that are not related to serving their customers.

This type of trading, which profits only the financial firm, often creates a conflict between the firm’s interest and its clients’ interest, Obama said. Proprietary trading also is inappropriate since banks receive government support through federal deposit insurance and access to the Federal Reserve’s discount window, 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,” Obama said.

“These kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong,” he said.

The financial regulatory reform bill that passed the House in December authorized regulators to prohibit large financial firms from engaging in excessively risky activities. Similar legislation is being developed in the Senate.

The president said his latest proposals would strengthen these financial regulatory reforms. The legislation already includes enhanced consumer protections, higher capital standards and liquidity requirements, regulation of derivative markets, and a resolution authority to wind down large firms if they fail.

Senator Chris Dodd, who chairs the Senate Banking Committee, said he would give “careful consideration” to the president’s new proposals.

“I agree with President Obama that taxpayers should not be underwriting these risky activities,” said Dodd, who chairs the Senate Banking Committee. “Companies that choose to take such risks should do so on their own dime and not in a way that threatens the stability of our economy.”

The Financial Services Roundtable, however, said the administration’s proposed limits on financial firms would be counterproductive.

“The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs,” said Steven Bartlett, president and CEO of the roundtable, which represents large financial firms.

Wall Street reacted negatively to the president’s proposals. Shares of big banks dropped sharply, contributing to a 213-point drop in the Dow Jones Industrial Average as of 1 p.m.

House Minority Whip Eric Cantor, a Virginia Republican, criticized the proposals, saying they “will only create more uncertainty in the economy.”

Obama said “an army of industry lobbyists from Wall Street” is trying to block “commonsense rules” that would protect the economy.

“If these folks want a fight, it’s a fight that I’m ready to have,” the president said.

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Kent Hoover is the Washington bureau chief for bizjournals.