His plan to limit banks’ size and risky trading has spooked investors, but analysts say it would have only marginal effect on institutions like JPMorgan Chase, Bank of America and Citigroup –— and would be hard to enforce. And it’s not clear the rules would reduce taxpayers’ risk of having to bail out another big bank.
The White House has yet to provide details of the plan outlined on Thursday. But attention has centred on Obama’s effort to bar the biggest banks from doing what’s called proprietary trading. That’s when banks use their own money to make high-risk bets. If those bets go bad and a bank goes under, taxpayers could be on the hook.
The proposed overhaul marked Obama’s latest effort to more tightly police the nation’s largest banks. President Obama has also proposed a tax on banks to recoup billions in bailout money that was handed out at the height of the financial crisis in 2008.
The moves come as banks face increasingly hostile rhetoric from Obama. Obama has called bankers “fat cats” and vowed to defeat the banking industry’s lobbying efforts against financial reforms. Still, several analysts called Wall Street’s reaction to the latest proposals overkill.
One reason is that most big banks derive only a tiny fraction of their revenue from proprietary trading.
Douglas Elliott, fellow at Brookings Institution and a former investment banker, said much will depend on how lawmakers write the legislation, which has yet to be put even in draft form.
The banking industry has reacted sourly to Obama’s proposal. Edward Yingling, President & CEO of American Bankers Association, said his members are “very concerned” about it. One worry is how the limits on a banks’ size would affect their competitiveness against large foreign rivals like Barclays Plc, Royal Bank of Scotland and Deutsche Bank.
Several US banks said they need more details of Obama’s plan before they assess its effect. Obama’s proposal would also prevent banks that take federally insured deposits or that borrow from the Federal Reserve from owning or investing in hedge funds or private equity groups. That raises questions about J P Morgan’s ownership of Highbridge Capital, a London-based hedge fund that manages more than $20 billion. The fund, however, is funded solely with client money.
So it’s unclear what effect Obama’s proposal would have on the bank.
Some banks would be affected more than others. Goldman Sachs Group Inc, for example, has long been among the most aggressive trading firms on Wall Street. Proprietary trading accounts for roughly 10 per cent of Goldman’s yearly revenue. That works out to $4.5 billion based on the company’s 2009 performance. Adjusted for expenses, the new rules could, in theory, cost Goldman $1 billion in annual profit, according to the Citigroup report.
Other analysts warn Obama’s proposal could cause serious damage to banks. Meredith Whitney, an analyst who predicted much of industry’s tumult in recent years, said the new rules could hammer banks’ trading profits. “Our bet: This goes through, and it will not be pretty for banks or consumers,” Whitney said of Obama’s proposal in a report.