QuoteObama pushes new bank regulation
US President Barack Obama: "I am proposing simple, common sense reforms"
US President Barack Obama has proposed limits to the size of banks to try to prevent future financial crises.
"Never again will the American taxpayer be held hostage by banks that are too big to fail," Mr Obama said.
He recently announced a $117bn (£72bn) levy on banks to recoup money US taxpayers spent bailing out the banks.
US stocks - especially banks such as JPMorgan Chase and Bank of America - fell sharply as Mr Obama announced the sweeping new rules.
His proposals also include limits on the amount of risk banks can take, and banning retail banks from using their own money in risky financial transactions.
That prevents commercial banks from investing in hedge funds, private equity funds or engaging in so-called proprietary trading.
If these folks want a fight, it's a fight I'm ready to have
Barack Obama
The benchmark US Dow Jones industrial average dropped 1.7%. The US dollar also turned lower against the euro and UK pound.
"While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse," Mr Obama said.
The move is Mr Obama's first proposal since Republican Scott Brown's shock victory in Massachusetts to win a Senate seat.
Tough new rules
Mr Obama has proposed a raft of new regulation but it has been held up in political wrangling in both the Senate and House of Representatives.
Mr Brown's victory may make it harder to pass the rules Mr Obama has proposed.
Banks have also been lobbying against more stringent regulation.
"If these folks want a fight, it's a fight I'm ready to have," he vowed.
The president dubbed his proposals on limiting bank risk the Volcker rule - after Paul Volcker, one of his economic advisors and a former chairman of the Federal Reserve central bank.
The moves follow popular anger at financial institutions, who have been paying large bonuses to staff even as they accepted government bail-outs to keep them going.
The tax will claw back some of the losses from a $700bn taxpayer bail-out of US banks known as the Troubled Asset Relief Program (Tarp).
It was drawn up in the midst of the financial crisis in 2008, following the collapse of US investment bank Lehman Brothers and rescue of insurance giant American International Group (AIG).
Mr Obama' s proposals appear to be a return to the principles underlying the Glass-Steagall Act.
That law - from the 1930s in the aftermath of the Great Depression - separated commercial and investment banking and was eventually abolished in 1999 under President Bill Clinton.
Mr Clinton's financial secretary at the time, Robert Rubin, previously worked at Goldman Sachs and went on to be an advisor to Citigroup until last year.
He should refer to himself in the third person with a definite article when he makes pronouncements like that. " If these folks want a fight, it's a fight the Barack is ready to have" sounds more menacing.
Bluster aside, I wonder if there could be any significant reform for banks passed through this Congress. There's a lot of voter anger on the issue, but there's a lot of bank lobbyists with money as well. :hmm:
I was wondering why the market was tanking today.
I'm still befuddled by that tax to pay for the loans that were paid back. Is JP Morgan supposed to pay for the money the Treasury will lose on AIG and GM?
Quote from: Admiral Yi on January 21, 2010, 01:20:48 PM
I was wondering why the market was tanking today.
I'm still befuddled by that tax to pay for the loans that were paid back. Is JP Morgan supposed to pay for the money the Treasury will lose on AIG and GM?
It's not like AIG or GM will be paying it back.
Meh, all the big boys should pay. Given the interconnectedness of the financial system, none of them would stick around if TARP wasn't enacted, even the banks like JPMorgan that appear to have been the least reckless of the lot.
Quote from: DGuller on January 21, 2010, 01:25:56 PM
Meh, all the big boys should pay. Given the interconnectedness of the financial system, none of them would stick around if TARP wasn't enacted, even the banks like JPMorgan that appear to have been the least reckless of the lot.
Or even the foreign banks that are off the hook for this tax.
Your logic would make perfect sense if the damage wrought by a collapse of the financial system would have extended no further than the walls of the banks. But of course it wouldn't have.
The tax is pure politics.
Quote from: Admiral Yi on January 21, 2010, 01:33:42 PM
Your logic would make perfect sense if the damage wrought by a collapse of the financial system would have extended no further than the walls of the banks. But of course it wouldn't have.
I am confused. There is no question the the actions of the Treasury and Fed were of enormous benefit to banks individually and as an industry. The fact that there was a more general benefit to avoiding a general financial collapse does not change that fact, it only reinforces the point about what would have happened in the absence of government action.
If only these banks were nationalized-- then they'd no longer be his enemy.
QuoteHis proposals also include limits on the amount of risk banks can take, and banning retail banks from using their own money in risky financial transactions.
That prevents commercial banks from investing in hedge funds, private equity funds or engaging in so-called proprietary trading
Obama's Glass-Steagall? Good.
Quote from: The Minsky Moment on January 21, 2010, 02:18:08 PM
I am confused. There is no question the the actions of the Treasury and Fed were of enormous benefit to banks individually and as an industry. The fact that there was a more general benefit to avoiding a general financial collapse does not change that fact, it only reinforces the point about what would have happened in the absence of government action.
It's pretty clear that we would have recovered sooner without government meddling in the financial industry. The TARP was just an excuse for a federal power grab at the expense of the private sector.
Quote from: Admiral Yi on January 21, 2010, 01:33:42 PM
The tax is pure politics.
Maybe. But there was a British banker on the news talking about this when it was announced over the weekend or last week and he thought it was a pretty decent idea.
Quote from: Sheilbh on January 21, 2010, 03:19:49 PM
Maybe. But there was a British banker on the news talking about this when it was announced over the weekend or last week and he thought it was a pretty decent idea.
Brits and their love of taxes.
Quote from: Sheilbh on January 21, 2010, 03:19:49 PM
Maybe. But there was a British banker on the news talking about this when it was announced over the weekend or last week and he thought it was a pretty decent idea.
I'm sure he did. But how is that relevant?
We don't need more regulation, we just need to break up the huge ones into merely big ones.
Quote from: derspiess on January 21, 2010, 03:33:08 PM
I'm sure he did. But how is that relevant?
You could have it worse :lol:
One of his point was that there does need to be some degree of payback by the banks and he thought that this plan - which in effect says 'I don't care where the money comes from, just pay back' - is far better than taxing bonuses or what he called 'individual punishment'. In the UK we're probably going to have an extra tax on super-high bonuses which is more individual punishment.
Quote from: MadImmortalMan on January 21, 2010, 03:44:09 PM
We don't need more regulation, we just need to break up the huge ones into merely big ones.
That would be useful but far more unlikely. Plus this regulation is, according to that article, merely a return to what you had a decade ago.
Quote from: MadImmortalMan on January 21, 2010, 03:44:09 PM
We don't need more regulation, we just need to break up the huge ones into merely big ones.
I think that's precisely wrong. Systemic over-leverage is going to lead a cluterfuck regardless of how big the biggest financial institutions are. The more leveraged everyone is in a financial system, the more correlated the fortunes of everyone are. The solution to that is restriction of leverage, which is a regulation territory.
Have we not already added more restriction on leverage?
Modest proposal for the banking sector:
Instead of mandating all sort of complex leverage regulations and adding more levels of supervision, why not simply forbid financial institutions from using the corporate form (perhaps with limited exceptions for "narrow banks")? Nothing like unlimited liability for imposing capital discipline.
This would also have the virtue of encouraging more rational comp practices.
Quote from: The Minsky Moment on January 21, 2010, 02:18:08 PM
I am confused. There is no question the the actions of the Treasury and Fed were of enormous benefit to banks individually and as an industry. The fact that there was a more general benefit to avoiding a general financial collapse does not change that fact, it only reinforces the point about what would have happened in the absence of government action.
My point is that if all the parties who benefitted from TARP should be paying for it that's all of us.
Quote from: The Minsky Moment on January 21, 2010, 06:27:44 PM
Modest proposal for the banking sector:
Instead of mandating all sort of complex leverage regulations and adding more levels of supervision, why not simply forbid financial institutions from using the corporate form (perhaps with limited exceptions for "narrow banks")? Nothing like unlimited liability for imposing capital discipline.
This would also have the virtue of encouraging more rational comp practices.
Does the United States have something like Alberta's Unlimited Liability Corporations?
""The liability of each of the shareholders of a corporation incorporated under the Act as an unlimited liability corporation for any liability, act or default of the unlimited liability corporation is unlimited in extent and joint and several in nature.""
I was saying over a year ago that overleverage would be less of a problem if the people enabling leverage (the debt holders) were made to pick up the tab. I guess the Obama administration doesn't read my posts.
Quote from: alfred russel on January 21, 2010, 08:38:53 PM
I was saying over a year ago that overleverage would be less of a problem if the people enabling leverage (the debt holders) were made to pick up the tab. I guess the Obama administration doesn't read my posts.
IMO, that wouldn't solve it. The reason we didn't make debt holders pay is because doing so would blow up the system. Sure, in theory, we can say: "Ok, we're serious this time, we won't bail you out again, we'll go into depression if we have to", but the credibility of such game-of-chicken threat would be dubious. It also requires rational thinking on the part of debt holders, which unfortunately is in short supply during speculative manias.
Quote from: Admiral Yi on January 21, 2010, 01:20:48 PM
I was wondering why the market was tanking today.
I'm still befuddled by that tax to pay for the loans that were paid back. Is JP Morgan supposed to pay for the money the Treasury will lose on AIG and GM?
The problem is that the "tax" is a bill of Attainder and clearly unconstitutional. if only the president had studied constitutional law at an Ivy league university and taught constitutional law at the university level he might know that. :D
The British Conservative Party, a group known for being advocates of the proletariat, apparently support Obama's proposal. :bowler:
Quote from: DGuller on January 21, 2010, 08:46:30 PM
IMO, that wouldn't solve it. The reason we didn't make debt holders pay is because doing so would blow up the system. Sure, in theory, we can say: "Ok, we're serious this time, we won't bail you out again, we'll go into depression if we have to", but the credibility of such game-of-chicken threat would be dubious. It also requires rational thinking on the part of debt holders, which unfortunately is in short supply during speculative manias.
A main reason we couldn't let the financials go bankrupt is that going through an ordinary bankruptcy proceeding would have destroyed the value of the institution. A financial company has to present a strong balance sheet or other parties can't entrust it with their assets. There is also the problem that a lot of the derivative contracts are very difficult to unwind (and credit unworthiness can unhedge another party destroying their balance sheet) and a lot of assets are illiquid.
Why not empower regulators to nationalize banks that are "too big to fail", which would wipe out equity holders but still allow the company to function and not ruin counterparties, and then allocate any government loss to debt holders? Add in some regulations of more dubious derivative instruments for good measure.
Right now it seems like a win-win for anyone holding the debt of a "to big to fail" financial institution, as they get bailed out if the company goes bust. So if you are a lender, why not lend as much as the institutions will take on? Trying to keep the financial institutions from taking on debt that is functionally subsidized and insured by the US government--seems destined to fail due to the ease you can move financial assets and liabilities out of the country and the multitude of ways you can take on liabilities (including some that are off balance sheet).
One thing to keep in mind in the whole too big to fail debate is that closing down banks through the normal FDIC procedure is not free. People don't normally buy failed banks with negative assets out of the goodness of their hearts and sense of civic duty.
Quote from: Neil on January 21, 2010, 08:01:16 PM
Does the United States have something like Alberta's Unlimited Liability Corporations?
""The liability of each of the shareholders of a corporation incorporated under the Act as an unlimited liability corporation for any liability, act or default of the unlimited liability corporation is unlimited in extent and joint and several in nature.""
Not that I know of - although each of the 50 states has their own corporation laws so there might be one out there.
Quote from: Admiral Yi on January 21, 2010, 07:00:24 PM
Quote from: The Minsky Moment on January 21, 2010, 02:18:08 PM
I am confused. There is no question the the actions of the Treasury and Fed were of enormous benefit to banks individually and as an industry. The fact that there was a more general benefit to avoiding a general financial collapse does not change that fact, it only reinforces the point about what would have happened in the absence of government action.
My point is that if all the parties who benefitted from TARP should be paying for it that's all of us.
I get that; I don't get the logic of the premise. The only way in which non-banks benefitted from TARP is that the horrible mistakes made in the financial sector were blocked from sinking the entire economy.
Quote from: Hansmeister on January 21, 2010, 08:56:52 PM
The problem is that the "tax" is a bill of Attainder and clearly unconstitutional. if only the president had studied constitutional law at an Ivy league university and taught constitutional law at the university level he might know that. :D
This is just too funny - Hans is now aligning himself with the his constitutional lawyers friends at ACORN:
http://lawprofessors.typepad.com/conlaw/2009/12/acorn-defunding-is-a-bill-of-attainder-court-enjoins-the-continuining-appropriate-resolution-barring.html
Quote from: alfred russel on January 21, 2010, 09:26:48 PM
Why not empower regulators to nationalize banks that are "too big to fail", which would wipe out equity holders but still allow the company to function and not ruin counterparties, and then allocate any government loss to debt holders?
The problem to me seems to be that once you write off those debts, another set of balance sheets is suddenly in grave danger. This can go on until everyone is crushed in a deleveraging spiral.
I have decided to accelerate the construction of the Money Bin. Until it is ready, I have increased burials of cash in coffee cans.
Quote from: The Minsky Moment on January 22, 2010, 09:46:17 AM
I get that; I don't get the logic of the premise. The only way in which non-banks benefitted from TARP is that the horrible mistakes made in the financial sector were blocked from sinking the entire economy.
If the tax is supposed to be levied on those who benefitted from TARP, that's all of us.
If the tax is supposed to be levied on those who caused the crisis, that's largely firms no longer in business.
If the tax is supposed to reflect populist anger at "the financial sector" then it's perfectly designed.
Quote from: Admiral Yi on January 22, 2010, 11:43:45 AM
If the tax is supposed to be levied on those who caused the crisis, that's largely firms no longer in business.
Disagree.
Quote from: The Minsky Moment on January 22, 2010, 01:43:50 PM
Quote from: Admiral Yi on January 22, 2010, 11:43:45 AM
If the tax is supposed to be levied on those who caused the crisis, that's largely firms no longer in business.
Disagree.
Sun Trust, gone. Washington Mutual, gone. Lehman, gone. Bear Stearns, gone. Meryll Lynch, gone. AIG, in de facto receivership. Mr. Gaussian Cupola, hiding in China.
Those institutions combined are a pretty small % of the financial sector.
Quote from: The Minsky Moment on January 22, 2010, 01:55:56 PM
Those institutions combined are a pretty small % of the financial sector.
Not everyone in the financial sector was long on subprimes.
Quote from: Admiral Yi on January 22, 2010, 02:00:52 PM
Not everyone in the financial sector was long on subprimes.
1) Suprime was only part of the problem.
2) What about Citibank, BOA, JPM, etc - why in your view are they completely innocent?
Quote from: Admiral Yi on January 22, 2010, 02:00:52 PM
Quote from: The Minsky Moment on January 22, 2010, 01:55:56 PM
Those institutions combined are a pretty small % of the financial sector.
Not everyone in the financial sector was long on subprimes.
Subprimes are a red herring. The crisis was about way more than just subprime mortgages. It was about the reckless use of financial instruments in general. Subprimes were just the first domino to fall.
Quote from: The Minsky Moment on January 22, 2010, 02:04:46 PM
1) Suprime was only part of the problem.
2) What about Citibank, BOA, JPM, etc - why in your view are they completely innocent?
1) Subprime + associated deriviates were the problem. If you were long in CDO, you were long in subprime.
2) I don't know much about Citi except that they're fucked. Tax the shit out of them for all I care. Course we own 80% of it so we're taxing ourselves.
My understanding is that JPM's subprime portfolio was high quality and survived the crash in pretty good shape. BOA I *think* acquired most of their exposure through purchases of Sun Trust and Merryll. Correct me if I'm wrong.
Quote from: DGuller on January 22, 2010, 02:06:46 PM
Subprimes are a red herring. The crisis was about way more than just subprime mortgages. It was about the reckless use of financial instruments in general. Subprimes were just the first domino to fall.
The reckless use of financial instruments who's value derived from subprime mortgages. I have yet to read about any firm losing a trillion dollars on credit swaps, options, or futures.
Quote from: DGuller on January 22, 2010, 10:30:49 AM
Quote from: alfred russel on January 21, 2010, 09:26:48 PM
Why not empower regulators to nationalize banks that are "too big to fail", which would wipe out equity holders but still allow the company to function and not ruin counterparties, and then allocate any government loss to debt holders?
The problem to me seems to be that once you write off those debts, another set of balance sheets is suddenly in grave danger. This can go on until everyone is crushed in a deleveraging spiral.
Not only that, but that wouldn't even eliminate the temptation to meddle, since the retirements of so many voters are riding on those companies via mutual funds and the like.
Add Freddie and Fannie to the list. We own them too.
Quote from: Admiral Yi on January 22, 2010, 02:17:30 PM
Quote from: DGuller on January 22, 2010, 02:06:46 PM
Subprimes are a red herring. The crisis was about way more than just subprime mortgages. It was about the reckless use of financial instruments in general. Subprimes were just the first domino to fall.
The reckless use of financial instruments who's value derived from subprime mortgages. I have yet to read about any firm losing a trillion dollars on credit swaps, options, or futures.
Subprimes were the trigger, but it wouldn't have been what it was if everybody wasn't as highly leveraged as they were.
Quote from: Admiral Yi on January 22, 2010, 02:17:30 PM
The reckless use of financial instruments who's value derived from subprime mortgages. I have yet to read about any firm losing a trillion dollars on credit swaps, options, or futures.
AIG's losses were primarily due to its massive CDS exposure.
Subprime was really just the canary in the coal mine. If you recall, about a year ago I posted some of the OECD analyses of credit losses - subprime accounted only for a fraction of the estimated credit losses (unrealized). The significance of subprime was that b/c it had the weakest collateral, it was the first to be affected by the panic. The only reason the rest didn't follow was b/c of a massive, unprecdented stabilization by Treasury and Fed + a certain degree of forbearance in strict application of mark-to-market principles while the federal intervention could be felt.
Quote from: The Minsky Moment on January 22, 2010, 03:14:30 PM
AIG's losses were primarily due to its massive CDS exposure.
Subprime was really just the canary in the coal mine. If you recall, about a year ago I posted some of the OECD analyses of credit losses - subprime accounted only for a fraction of the estimated credit losses (unrealized). The significance of subprime was that b/c it had the weakest collateral, it was the first to be affected by the panic. The only reason the rest didn't follow was b/c of a massive, unprecdented stabilization by Treasury and Fed + a certain degree of forbearance in strict application of mark-to-market principles while the federal intervention could be felt.
Did AIG suffer massive losses in CDS covering some sort of default aside from subprime mortgages? If so, that's interesting to know but I don't really see how it relates to the issue of who should pay for the bailout of AIG, GM, and Chrysler.
Quote from: Admiral Yi on January 22, 2010, 03:26:18 PM
Did AIG suffer massive losses in CDS covering some sort of default aside from subprime mortgages?
Yes IIRC their CDS portfolio was primarily insuring corporate bonds.
QuoteIf so, that's interesting to know but I don't really see how it relates to the issue of who should pay for the bailout of AIG, GM, and Chrysler.
The government paid for those bailouts.
Quote from: The Minsky Moment on January 22, 2010, 04:24:20 PM
The government paid for those bailouts.
I don't get it. This thread is about a special tax on the 100 largest financial institutions to help pay for the bailout. Either you are being uncharacteristically dense or stratospherically clever.
Quote from: The Minsky Moment on January 22, 2010, 09:53:15 AM
Quote from: Hansmeister on January 21, 2010, 08:56:52 PM
The problem is that the "tax" is a bill of Attainder and clearly unconstitutional. if only the president had studied constitutional law at an Ivy league university and taught constitutional law at the university level he might know that. :D
This is just too funny - Hans is now aligning himself with the his constitutional lawyers friends at ACORN:
http://lawprofessors.typepad.com/conlaw/2009/12/acorn-defunding-is-a-bill-of-attainder-court-enjoins-the-continuining-appropriate-resolution-barring.html
I love the way you complete sidestepped the Constitutional issue. I guess they didn't teach the Constitution in your law school either?
Quote from: Hansmeister on January 22, 2010, 04:39:56 PM
I love the way you complete sidestepped the Constitutional issue. I guess they didn't teach the Constitution in your law school either?
Given how rarely taxation and regulation have been overturned as bills of attainder, I rather doubt it is as clearcut as you seem to think. Then again, I'm not a lawyer.
But I am the LORD your God.
When you have a Supreme Court filled with right wing judicial activists, past precedent is irrelevant.
Yi, isn't SunTrust still going strong?
Quote from: DGuller on January 22, 2010, 10:30:49 AM
Quote from: alfred russel on January 21, 2010, 09:26:48 PM
Why not empower regulators to nationalize banks that are "too big to fail", which would wipe out equity holders but still allow the company to function and not ruin counterparties, and then allocate any government loss to debt holders?
The problem to me seems to be that once you write off those debts, another set of balance sheets is suddenly in grave danger. This can go on until everyone is crushed in a deleveraging spiral.
I disagree--not everyone's balance sheet was in grave danger. In those cases, you end up transferring taxpayer wealth to corporate shareholders. Not to mention that American taxpayers end up bailing out a bunch of foreign entities.
Quote from: Admiral Yi on January 22, 2010, 04:35:22 PM
Quote from: The Minsky Moment on January 22, 2010, 04:24:20 PM
The government paid for those bailouts.
I don't get it. This thread is about a special tax on the 100 largest financial institutions to help pay for the bailout. Either you are being uncharacteristically dense or stratospherically clever.
I thought the thread was about the new regulatory proposals, not the "levy"
The Obama tax proposal as I understand it is simply a tax on financial institution liabilities, with a credit for bank deposits. To the extent the tax based on the premise the government has become the lender of last resort to the financial industry, to the considerable benefit of that industry, and to the considerable hazard of the government, the tax makes a certain sense. The idea is that banks should pay a fee for the implicit insurance they are receiving in proportion to their exposure (liabilities) - just like the FDIC charges fees for its explicit insurance. Indeed, that is the very reason for giving the credit for deposits - they are already "taxed" by the FDIC.
Quote from: Neil on January 22, 2010, 05:23:40 PM
Quote from: Hansmeister on January 22, 2010, 04:39:56 PM
I love the way you complete sidestepped the Constitutional issue. I guess they didn't teach the Constitution in your law school either?
Given how rarely taxation and regulation have been overturned as bills of attainder, I rather doubt it is as clearcut as you seem to think. Then again, I'm not a lawyer.
But I am the LORD your God.
And in this case your omniscience trumps your lack of a specialized qualification.
Quote from: alfred russel on January 22, 2010, 05:43:03 PM
Yi, isn't SunTrust still going strong?
I might have gotten the name wrong. Who gave Dodd his VIP mortgage?
Countrywide?
It's now known as Bank of America Home Loans.
Quote from: The Minsky Moment on January 22, 2010, 05:57:00 PM
I thought the thread was about the new regulatory proposals, not the "levy"
The Obama tax proposal as I understand it is simply a tax on financial institution liabilities, with a credit for bank deposits. To the extent the tax based on the premise the government has become the lender of last resort to the financial industry, to the considerable benefit of that industry, and to the considerable hazard of the government, the tax makes a certain sense. The idea is that banks should pay a fee for the implicit insurance they are receiving in proportion to their exposure (liabilities) - just like the FDIC charges fees for its explicit insurance. Indeed, that is the very reason for giving the credit for deposits - they are already "taxed" by the FDIC.
It makes a certain amount of sense if in exchange for the new tax on liabilities the banks recieve a de jure or de facto promise of future bailouts. But the language Obama has been using is that the tax is to pay back the money spent on this bailout.
Third day in a row the market is tanking. :(
Quote from: Admiral Yi on January 23, 2010, 10:10:12 AM
Third day in a row the market is tanking. :(
I'm getting a little pissed off now.
Quote from: Ed Anger on January 23, 2010, 10:39:20 AM
Quote from: Admiral Yi on January 23, 2010, 10:10:12 AM
Third day in a row the market is tanking. :(
I'm getting a little pissed off now.
Maybe you should have thought about who was in the White House and who controlled your backwards Congress before you invested in something.
If I were your king, the market would be stable and predictable.
Quote from: Neil on January 23, 2010, 10:57:38 AM
If I were your king, the market would be stable and predictable.
Until the second Ghost Dance dealt with your Injun hatin' ways.
This blog post by the BBC's Business Editor was interesting:
QuoteWhat Obama's bank reforms really mean
Robert Peston | 09:52 UK time, Friday, 22 January 2010
President Obama certainly brought the recession to an end for political lobbyists yesterday.
In the past year, Wall Street spent around $500m on lobbying and in contributions to US legislators. That will probably sky-rocket this year, as Wall Street battles to prevent President Obama's proposals to break up the big banks from being passed into law by Congress (and as luck would have it, only yesterday the Supreme Court abolished the ceiling on campaign contributions by corporates).
President ObamaBut let's assume that the president's reforms stand a better than evens chance of being implemented in some form or other, simply because the banks have done such an impressive job of alienating themselves from the public.
What would it mean for there to be a prohibition on banks' involvement in running hedge funds, private equity and proprietary trading, and a new limit on the size of banks?
Well it depends on whether President Obama is using words with regulatory precision, or whether it is the spirit of the plans that matter.
Actually in the US, that distinction is less important: what he has in mind would plainly lead to a complete reconfiguration of the likes of JP Morgan, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs.
Goldman Sachs and Morgan Stanley would have the option of escaping the constraints by giving up their newly won banking status. But if that also deprived them of access to emergency funding by the US central bank, the Federal Reserve, well they would probably find that it became much more expensive for them to borrow (because creditors would see them as a much worse credit risk).
And that would significantly impair their profitability.
By contrast, in the UK that distinction between letter and spirit would be crucial. Because none of our banks are huge in the areas spelled out by Obama: Barclays has a private-equity fund specialising in the takeover of medium-size companies and tells me it closed down its prop trading desk a few years ago; RBS announced a few months ago it would be pulling out of prop trading.
If however Obama means - in a more general sense - that he wants to prevent banks that receive any kind of explicit or implicit taxpayer support from speculating for their own account and benefit, rather than on behalf of clients, well that would represent a profound cultural and economic shift for all the world's biggest banks.
The market seems to think that what Obama has in mind is specific rather than general - so Barclays' shares this morning have fallen just a bit, and RBS's are almost unchanged.
But that may be naive. Bankers tell me that they recognise Obama's intervention has profoundly changed the weather for international negotiations on the future of banking.
If America has abandoned its conservative approach to bank reform, which it has, there is a substantial probability that the model of the universal bank - one that takes substantial speculative risks underpinned by the insurance of emergency funding from a central bank and with access to cheap insured retail deposits - will be killed off.
Which is not the same thing as saying that the world will divide into pure retail banks and pure investment banks. The French, Germans and Swiss - with their long universal-banking traditions - will probably resist such a bifurcated banking industry with every last breath in their bodies.
But I think we can assume that in a general sense banks will be forced to go back to the basics of making money from the long-term risks of lending. Their involvement as traders on their own behalf in liquid markets will be reduced. And their role as providers of equity or quasi-equity to businesses from their own funds will diminish.
However let's be under no illusion that such reform would immediately sanitise financial markets for generations. It would serve as a spur to what has become known as shadow banking.
Much of the speculative risk-taking and clever-clever financial innovation would be driven out of banks and into proxy banks - and unless these proxy banks were supervised and regulated as closely as banks, chances are that the next financial crisis would simply have been shipped to institutions with different names (structured investment vehicles, hedge funds and so on).
Finally, as the shadow chancellor George Osborne said this morning, there may not be any point in the UK leaping ahead of the US with a unilateral reform agenda.
If a UK government massively restricted the activities of British banks in a way that was very different from the constraints of their overseas competitors, you can probably guess what British banks would do.
There's a fair chance that Barclays would move its legal home to Dublin or Amsterdam (where it almost went, when negotiating to buy ABN Amro a few years ago), Standard Chartered would up sticks to Singapore and HSBC could relocate to Hong Kong.
Only Royal Bank and Lloyds would be unable to budge, because the state as the biggest shareholder could order them to stay put.
UPDATE 12.01
The share prices of European banks, from Barclays and RBS to Deutsche and Credit Suisse, have now fallen quite sharply.
Which implies that investors have clocked the general significance of Obama's readiness to have a serious scrap with banks.
it means, as I noted earlier, that the global climate for bank reform has been changed by the American president very considerably, and not in a way that favours the status quo.
He also mentioned elsewhere that George Osborne (Shadow Chancellor) has proposed broadly what Obama's pushing for, but said he'd support it in the UK only on the condition that there'd be an international movement to similar regulation. Now he's got that apparently the Tories are very supportive of it all.
Quote from: Ed Anger on January 23, 2010, 11:03:29 AM
Until the second Ghost Dance dealt with your Injun hatin' ways.
Why would I hate Indians in the US? They are properly dealt with down there. The US treats them like real people, so they act like real people.