Business Times - 26 Jan 2010
Obama's new populist push against Wall St
President and his aides hope new approach will help boost his political fortunes
By LEON HADAR
AFTER one year in office and against the backdrop of growing anti-Wall Street anger among Americans being fuelled by continuing high unemployment rates and the signs that the big banks are once again taking reckless risks in the pursuit of quick profits, US President Barack Obama has decided that the time has come to alter the political-economic narrative of his administration.
Indeed, in the aftermath of the disastrous loss of the Democratic Senate seat in Massachusetts - a dramatic reflection of the populist mood around the country - and as he fights for his political survival (and that of his own Democratic Party), Mr Obama has decided that the time has come to get tough - really tough! - with Wall Street.
Launching a verbal assault against the mega banks and stating that the current economic crisis started when they had taken huge and 'reckless risks in pursuit of quick profits' and massive bonuses, Mr Obama proposed on Thursday - a day after the stunning Republican win - to impose new federal regulations that would restrict the size of banks and on their 'proprietary trading'.
Proprietary trading is a reference to the money a bank makes for itself by using its own cash to make big, sometimes risky, bets. By engaging in proprietary trading operations, the banks are seen as abusing privileges they have - such as access to cheap capital from the Federal Reserve and from deposits.
Hence, by going after the banks' proprietary trading, the government could supposedly help limit the risks they take.
'We have to enact commonsense reforms that will protect American taxpayers and the American economy from future crises as well, for, while the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near-collapse,' Mr Obama said. The banks want to collect their profits when their gambles pay off, but they also want taxpayers to bail them out when things go bad, he explained. He called on Congress to adopt major reforms aimed at strengthening the federal government's regulatory power over the financial industry.
First, to reduce risk, Mr Obama called for a separation of the functions of investment banking from commercial banking, ensuring that investment banks cannot gamble with insured commercial deposits. In effect, Mr Obama was proposing a ban on commercial banks owning, investing in or sponsoring hedge funds and private equity funds.
He would also bar financial institutions from investing money for their own benefit, restoring restriction similar to those first legislated in the Great Depression under the Glass-Steagall Act, which separated commercial from investment banking. Most of the Glass-Steagall restrictions were repealed by Congress and then-president Bill Clinton in 1999.
And Mr Obama said he also wanted to limit the size of any single firm in the financial sector by giving regulatory authorities power to do that and ensure that financial institutions do not become 'too big to fail'. Americans should never again be held hostage by firms deemed too big to fail, he said.
In addition, Mr Obama has already proposed imposing a fee on the large banks to cover shortfalls in the federal rescue fund. He demanded that the biggest banks repay the US$120 billion or so still owed to the government from the bailout.
Mr Obama acknowledged that Wall Street and their allies in Washington were going to use all their financial and political power to torpedo his proposals. And he seemed to be welcoming that, relishing the idea of engaging in a fight with those 'fat cats'.
'But what we've seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and commonsense rules of the road that would protect our economy and the American people,' he said, ending his remarks with some strong fighting words. 'So if these folks want a fight, it's a fight I'm ready to have,' he said.
What a difference one Senate race can make!
For 52 weeks, Mr Obama pursued his White House predecessor's policies of stabilising the financial markets by injecting them with massive amount of taxpayers' money - not to mention the 'easy money' monetary policy of the Federal Reserve.
His two top economic advisers, Treasury Secretary Timothy Geithner and Lawrence Summers, the director of the National Economic Council, have cautioned him that any attempt to impose new stringent regulations on the financial institutions - for example, by placing restrictions paying gigantic bonuses to top executives - could retard the recovery of the financial system.
In fact, according to the perception shared by members of the progressive wing of the Democratic Party and several liberal economists, notwithstanding his occasional tough rhetoric, Mr Obama seemed to be operating under the influence of Mr Geithner and Mr Summers - who themselves were proteges of former Treasury secretary and leading Wall Street banker Robert Rubin. Mr Obama maintained his somewhat cozy relationship with Wall Street as he focused on getting the banks back to profitability as soon as possible.
Moreover, sources in the administration indicated that Mr Geithner and Mr Summers were responsible for blocking ideas to limit the size of banks and the restrictions on risks they could take on. This included a plan by former Fed chairman Paul Volcker to separate the banks' commercial and investment functions. Instead, the administration and Congress were considering new legislation to increase the power of the Fed to supervise the conduct of financial institutions and to create a new agency that would protect the interests of consumers.
But under pressure from Wall Street lobbyists who tend to provide huge financial contributions to both Republican and Democratic lawmakers, it was becoming clear that the chances for getting Congress to approve even such limited steps to reform of the financial industry's regulatory system were very slim.
And while there have been some clear signs that the American economy is on the road to recovery, the unemployment rate continues to remain very high, which only helps fuel the public's impression that the Obama administration was more concerned about Wall Street - where financial institutions were planning to confer US$150 billion in bonuses to their executives - than with the economic plight of middle-class working Americans.
With the political climate changing in a very dramatic way, Mr Obama decided to abandon the Geithner-Summers accommodative approach vis-a-vis Wall Street, and embrace a aggressive strategy, including by adopting Mr Volcker's plan to ban banks that take deposits to trade stocks for their own profit - which some critics in Wall Street see as part of an effort to break up large, well-managed the mega banks and to reinstate the Glass-Steagall restrictions.
The sell-off in financial stocks last Thursday and Friday highlighted the fact that Wall Street was concerned about the administration's new proposals, a sentiment that is shared by some officials and lawmakers in Washington who insist that the Obama administration still needs the cooperation of the large financial institutions in order to accelerate the economic recovery.
Mr Obama and his aides are hoping that identifying with the populist insurgency and turning the anger of the American people against Wall Street and its Republican allies in Congress will help boost Mr Obama's political fortunes.
But the growing opposition among Democrats in Capitol Hill against the re-nomination of Ben Bernanke for a second term as Fed chairman - Mr Bernanke is Mr Obama's choice for the job - suggests that when you help re-energise populist rebels, you should not be surprised if you end up becoming their next target.
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