Obama administration to get tough with “too big to fail” banks

Posted by AzBlueMeanie:

Talk about a case of bad timing. The Obama administration finally announced on Thursday a get tough policy with the bailed out financial services industry while across town the U.S. Supreme Court was arming that industry with the right to spend unlimited billions of dollars to defeat the proposed reforms (they have already spent millions over the past year to stall the reforms moving through Congress, often using taxpayer TARP funds to pay their lobbyists).

The most heartening news is that Paul Volcker, who had been ignored by Obama's Wall Street advisers Timothy Geithner and Larry Summers, is suddenly front and center and in charge of the new program. This indicates there may have been a tectonic shift inside the White House on economic policy. Mr. President, I hope you will go further and ask for the resignations of Geithner and Summers. And withdraw your nomination of Ben Bernanke as Federal Reserve Chairman. They are a lead weight around the neck of your administration.

From Jed Lewison at Daily Kos: Taking on out-of-control big banks:

President Obama [Thursday] announced his proposed "Volcker Rule," which would limit the reckless risk-taking of big banks by barring them from "from owning, investing, or sponsoring hedge fund or private equity funds and from engaging in proprietary trading."

Watch:

Today's proposal comes on the heels of President Obama's proposal last week to tax big banks until taxpayers have recouped the entire cost of the bailout.

It will probably take some time and repetition — plus a healthy dose of results — but the Obama Administration appears serious about responding to voter discontent with the bailouts.

One reason for optimism: from a communications perspective, unlike the health care bill, President Obama getting ahead of Congress with specific proposals of his own on financial reform measures. Moreover, the administration is breaking them into manageable chunks. Instead of one overall behemoth, they are presenting individual policy proposals. That makes it much easier for the administration to to define what they are for. Health care, by contrast, was such a huge bill (probably necessarily so) that it became impossible to boil it down to any one thing. That largess made it a bit of a Rorschach test, allowing Republicans to effectively make up their own attacks on it.

So at least from a messaging perspective, it seems the Obama Administration is learning lessons from the past. That bodes well for the future.

And more from Meteor Blades at Daily Kos (It's Not Called the 'Summers Rule' for a Reason):

[O]ne thing is clear, former Fed Chief Paul Volcker, who was seen as pretty much out of the loop even as an outside-the-inner-circle adviser of the Obama administration over much of the past year is suddenly front and center with his name attached to the new policy of tighter banking controls the President announced today.

The "Volcker Rule" is about the best branding imaginable, given the former Fed chairman’s statements in England a month ago challenging executive pay at banks and saying that the industry’s biggest innovation in the past few decades was not credit default swaps but the ATM.  Certainly, Volcker’s mark was not so prominent in last June’s White House white paper [pdf] on financial reform. Today, however, the President said:

The fact is, these kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong.  We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest.  And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses.

I am proposing a simple and common sense reform which we’re calling the Volcker rule after this tall guy behind me. Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. If financial firms want to trade for profit, that’s something they’re free to do. Indeed, doing so – responsibly – is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.

In addition, as part of our efforts to protect against future crises, I'm also proposing that we prevent the further consolidation of our financial system.  There has long been a deposit cap in place to guard against too much risk being concentrated in a single bank.  The same principle should apply to wider forms of funding employed by large financial institutions in today's economy.  The American people will not be served by a financial system that comprises just a few massive firms.  That's not good for consumers; it's not good for the economy.  And through this policy, that is an outcome we will avoid.

There are good reasons the proposal was not named the Geithner Rule or the Summers Rule or, most especially, not the Rubin Rule, since those worthies were co-conspirators in efforts to deregulate the financial system in the ‘90s and to put up obstacles to re-regulation now.

As always, of course, the devil of the proposal will be in its details and what those details look like when it emerges from the Senate Banking Committee. The White House has made clear that it is not proposing a return to Depression-era laws, which is code for, among others, the 1933 Glass-Steagall banking reform act that was repealed in 1999 thanks in part to two high-level members of the Obama administration. Interestingly, Volcker is said to have advised Senator Maria Cantwell when she was drafting, together with Senator John McCain, a bill to restore Glass-Steagall.

Note to White House: back the restoration of the Glass-Steagall Act. Throw Geithner, Summers and Rubin overboard; they were accessories to this crime. They should not be advising economic policy now.

One Senator who has more in mind than the White House in this regard is Bernie Sanders, who had this to say:

"President Obama’s proposal is a major step forward to limit the greed and reckless behavior of Wall Street that has caused so much damage to the economy.  We need to do everything we can to limit the size of too-big-to-fail financial institutions and end the gambling addiction on Wall Street.

"One of the reasons I am strongly opposed to the re-nomination of Ben Bernanke is that, in truth, he has had the power to do this from day one.  Our goal must be to create a new Wall Street that invests in the productive economy creating decent paying jobs for all Americans."

Sanders has authored S. 2746, The Too Big to Fail, Too Big to Exist Act, which would require the Treasury Department to break up overly large institutions. So far, no co-sponsors.

But, while today's proposals do not go far enough, they are two overdue steps in the right direction.