Chillin' out till it needs to be funded
In a big public punch at the Street for the third time in Bank results week, Obama enumerated the new Volcker rule to add-on to the reforms instituted by Barney and Dodd
After the treasury induced reforms that were more a laundry list of all measures, with existing internal controls at banks pushed into the open, in the next round against criminal misuse of the monetary and fiscal basis, Obama leaned towards Paul Volcker to introduce risk based limits for the Treasuries at commercial and investment banks. Goldman Sachs has already brought leverage down to 4.42 times net worth during the upheaval of 2009.
In an interview with ABC on Wednesday Mr Obama characterised the move by saying that the administration was about to get into a “big fight with the banks.”
“We’ve got a financial regulatory system that is completely inadequate to control the excessive risks and irresponsible behaviour of financial players all around the world,” he said.
“People are angry and they’re frustrated. From their perspective, the only thing that happens is that we bail out the banks… We’re about to get in a big fight with the banks.”
An administration official on Wednesday said the plan – in discussion for the last couple of months – was born out of a need to “cut down on excessive risk taking”.
The announcement is likely to stop short of the return to a forced separation between riskier investment banking and the utility functions of retail and commercial banking that was enshrined in the Glass-Steagall Act.
Goldman Sachs – which runs a large proprietary trading business and which reported stronger than expected fourth-quarter profits on Thursday – will be watching the details closely, but the measures are more likely to threaten institutions whose operations are large and span commercial and retail operations as well as trading for their own benefit.
“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.
“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,” Obama added.
The proposal aims to deter commercial banks from becoming so large that they put the broader economy at risk and distort normal competitive forces
Key measures mentioned by Obama directly in his statement from the White house are:
A. Banks should not be allowed to own Private Equity Arms and Hedge Funds
B. Like the current caps on deposits with a single bank, there will be risk limits to avoid further consolidation of risk in the banking system
These will be Reforms to protect consumers and Reforms to close loopholes that allow big banks to trade risky financial derivatives like credit default swaps without oversight ( prop trading desk risk limits, off-balance sheet exposure restricted) without oversight..to strengthen liquidity and ensure that no large firm can take the entire economy down because it is “TOO BIG TO FAIL”
The VOLCKER RULE will restrict banks under the purview of Federal Deposit Guarantee from operating Hedge funds and PE funds inside banks esp as Taxpayers won’t pay when the bank fails