Obama moves to cut big banks down to size
President Obama Thursday proposed new limits on banks' size as well as their ability to take risks. The move is part of reform measures to avert a repeat of the practices that led to the financial crisis. The stock market fell in response to the news.
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The fall in Goldman stocks was mirrored by other financial companies and the stock market as a whole. The markets rallied slightly in the afternoon after Rep. Barney Frank (D) of Massachusetts, chair of the House Financial Services Committee, told CNBC that he would be inclined to give the banks three to five years to spin off their assets. The Dow Jones industrial average tumbled 213.7 points, closing Thursday at 10,389.88 points.Skip to next paragraph
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Obama’s pique reflects public indignation. Banks, faced with mounting losses on their credit cards, have hiked credit card interest rates and fees and tightened standards. Many of those changes took place as Congress was passing more consumer-friendly credit card legislation.
The new proposals, along with other pending financial reform, have the potential to completely change the banking system, analysts says.
“Most of the things that will be different are not readily observable, they have to do with the safety and profitability of the banks,” Mr. Elliott says.
Hard to enforce?
Banning banks from trading for their own account has potentially huge ramifications, Elliot says, since banks do a large amount of investment. “Maybe 30 percent of their assets are investments,” Elliott says. “How do you tell the difference between those investments and proprietary investments?”
The separation of “trading desks” and “investment desks” at these banks are mainly a matter of convenience, Elliott adds. “If there were no trading desks, they [would] have the same people do most of the functions of the trading desk on the normal investment desks. How do you draw the line?”
The proposal to limit the size of banks’ liabilities may also be difficult to enforce. Prior to the financial collapse, there were limits on the amount of deposits any single bank could hold. But as huge banks such as Washington Mutual began to fail in 2008, the Federal Reserve waived those regulations to allow the failing banks to be acquired.
The Financial Services Roundtable, which represents 100 of the largest financial services companies, issued a statement Thursday saying it supported Obama’s goals and efforts to strengthen the financial system. But it added, “The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs.”
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