Thursday, January 21, 2010

Obama Wants to Ban Proprietary Trading

as expected. But wait, there's more. He also wants to ban investment in hedge funds by the banks. The stock market dives. Thank you Mr. President.

In the statement released by the White House this morning:

The proposal would:

1. Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

2. Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

The number 2 item is interesting. I'd love to see the detailed proposal. How is he going to limit the size of liabilities, other than levying a 0.15% tax which he already proposed this month? When does a growth become "excessive"? Who's to decide? Paul Volcker?

If Obama really wants to "put an end to the risky practices that contributed significantly to the financial crisis", he should first fire Ben Bernanke and Timmy Geithner, shut down Fannie and Freddie, stop making subprime loans via FHA, and reign in his runaway spending.

Cynics are saying that Obama wouldn't do anything that would anger one of his biggest sponsors (financial industry, particularly Wall Street banks), and this proposal was already agreed to by Wall Street.

I am not so sure. If Obama had gone to Larry Summers or Timmy Geithner and come with the proposal, that's one thing. But he went to Paul Volcker, whom he hadn't bothered to consult much till this issue. Volcker may genuinely believe that banks should go back to the ways he knew when he was the Fed chairman (1979 to 1987), before all the innovations (like algo trading) and proliferation of hedge funds took place (more later).

Currently, Dow Jones Industrial is down more than 220 points (over 2%) to 10,384 at 2:24 PM EST. Many of the same cynics are saying this is just Wall Street's way of scaring investors and scaring the government so that this proposal won't be enacted, just like Wall Street supposedly did (as they say) in September 2008. Back then, the banks deliberately tanked the market during the TARP discussion in Congress so that Congress would be scared into passing the bailout bill.

One thing these cynics seem to ignore: the market tanked in earnest AFTER the bailout bill was passed.


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