President Obama continues to try to curb risk taking on Wall Street. Today, one year after his inauguration, he has proposed a plan to limit the size and activities of big commercial banks. "While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse," said President Barack Obama at the White House. Mr Obama continued his populist rhetoric with the statement:
My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.
According to congressional sources and administration officials, this proposal is designed to return — at least in spirit — to some of the curbs that were instituted with the Glass-Steagall act back during the Great Depression. This plan has been backed by former Federal Reserve Chairman Paul Volker and is designed to limit the amount of risk that customer deposit activities might be exposed to.
Apparently President Obama wants to prevent commercial banks and institutions that own banks from owning and investing in hedge funds and private-equity firms. Similarly he hopes to limit the amount and type of proprietary trading that they might do for their own accounts. As a result of these proposals, the common equity securities of the large banking institutions have sold off as investors are unsure about what type of business models these banks might pursue in the future and hence what "normalized" profits might be.
Toomre Capital Markets LLC ("TCM") wonders whether any of these populist proposals will eventually be enacted into law. As Ace Greenberg, the retired CEO of Bear Stearns, said on CNBC today about the possible return of Glass-Steagall: "The egg has been scrambled and I don't think they can put it back in the shell." However, they are sure to appease those on Main Street that are disappointed with the bank bailouts and the large Wall Street bonuses.