PRESIDENT Barack Obama launched his biggest attack yet on the banking sector, revealing plans for the toughest overhaul of Wall Street since the Great Depression.
“If these folks want a fight, it’s a fight I’m ready to have,” Obama said, as he told retail banks they would no longer be able to take risky bets with their own capital to make money on the financial markets. The President also promised that “never again will the American taxpayer be held hostage by a bank that is too big to fail”, revealing plans to limit the size of banks and financial institutions. Some banks may have to break up as a result of the proposals.
Under Obama’s plans, banks that take deposits will not be allowed to carry out proprietary trading activities. They will also be banned from running hedge funds and making private equity investments.
“We should no longer allow banks to stray too far from their central mission of serving their customers,” Obama said. “We simply cannot return to business as usual,” he said, announcing the plans after the release of bumper profits from Goldman Sachs and a total bonus payout to its staff of $16.19bn (£1bn).
Shares in banks tumbled in London and on Wall Street on the news. In London, Royal Bank of Scotland fell seven per cent, while Barclays fell nearly six per cent. In New York, JPMorgan fell more than six per cent and Goldman was down four per cent.
After tumbling more than 18p a share Barclays lost a further 8p to 279p.
Proprietary trading operations have been enormously profitable for banks but the White House blames the practice for helping to nearly bring down the US financial system in 2008. “This is going to have a tremendous impact on big-name brokerage firms, like Goldman Sachs and JPMorgan,” said Ralph Fogel, investment strategist at Fogel Neale Partners in New York. “If they stop proprietary trading, it will not only dry up liquidity in the market, it will change the whole structure of Wall Street, of the whole trading community. Proprietary trading is a big money maker for some of these banks, they are not going to want to lose the kind of talent they have on those desks.”
The big banks hit back at the measures, saying they would stifle growth and innovation. “Trading, proprietary or otherwise, did not lead to the financial crisis,” said Rob Nichols, president of the Financial Services Forum.
He said the government should focus on better risk management and regulatory oversight, rather than arbitrary bans on certain activities.