Obama Proposes Limits on Wall Street Banks; Enough to Ease Main Street Anger?

New White House proposal sends Dow down 200 points.

January 21, 2010, 12:51 PM

WASHINGTON <br/> Jan. 21, 2010 &#151; -- President Obama today continued his attempt to reform Wall Street in the wake of the worst recession in generations, unveiling a proposal to cut down on the size and risk-taking of the nation's largest banks.

"This economic crisis began as a financial crisis, when banks and financial institutions took huge, reckless risks in pursuit of quick profits and massive bonuses," the president said in remarks at the White House.

The president today was accompanied by his economic team, including Treasury Secretary Tim Geithner, National Economic Director Larry Summers, and adviser Paul Volcker, the former Federal Reserve chairman who has been vocal in calling for such reforms.

After the financial crisis in the fall of 2008, the country's biggest banks have only grown bigger, said the president, emboldened by the recent government bailout's implication that they were "too big to fail" and by widespread failures of smaller community banks.

"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," the president said.

Now the administration intends to cut back on the size and scope of these institutions, as well as the extent of their risk-taking. The new proposal would crack down on high-risk trades by restricting proprietary trading at commercial banks. Banks would be prohibited from owning or investing in hedge funds and private equity firms.

"Never again will the American taxpayer be held hostage by a bank that is too big to fail," the president said.

As the White House has seen this past year, it is a long hard road from talking tough about Wall Street to enacting real changes in the financial system.

Immediately after the president delivered his statement at the White House, critics started voicing their opposition to his proposal, warning that it would have a negative effect on Wall Street's successes and therefore also Main Street's jobs prospects.

Critic Says Obama's Proposal Would Hurt Economy

Steve Bartlett, president and CEO of the Financial Services Roundtable, said that while the financial industry supported the administration's goals of responsible lending, creating jobs, and improving the economy, this latest measure would hurt, not help, in meeting those goals.

"The administration's new proposal is inconsistent with achieving these goals," Bartlett said. "The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs."

Investors also appeared to oppose the proposal. The Dow Jones Industrial Average was down 213 points, with bank stocks leading the downturn. Goldman Sachs dropped nearly $7 per share. Goldman had reported strong earnings today, but the bank relied heavily on profits made from so-called "proprietary trading," precisely the kind of activity the President wants to restrict.

Bank of America said there is "need for substantial regulatory reform to ensure that unregulated activities not be allowed to contribute to future crises." It said that, since the financial crisis occurred, it has reduced its risks by ending or limiting certain products and activities, including derivatives and private equity investments. But the bank stopped short of offering any reaction to the president's proposal, saying only that it would look at it carefully when its details became available.

Representatives of Goldman Sachs and JPMorgan Chase said the banking giants had no comment on the president's announcement.

The president's proposal has to make its way through Congress and, if the sluggish pace of financial regulatory reform is any indication, it could be some time before these measures become reality, if they ever do.

In recent months the financial industry has been waging a fierce battle with lawmakers to push back against the administration's regulatory reform effort, slowing momentum on Capitol Hill.

While the House of Representatives passed a measure late last year, the Senate has yet to get its bill out of committee.

Despite the challenges ahead for the administration's reform effort, the White House clearly feels the need to rein in Wall Street's excesses amidst an ongoing backlash from Main Street.

In an interview Wednesday with ABC's George Stephanopoulos, Obama said he was well aware of the general public's frustrations with the $787 billion bailout of the financial system, a program initiated by the Bush administration and then continued by the Obama regime.

"It was the right thing to do for us to salvage the financial system and I make no apologies for that," the president said. "But we knew at the time how politically toxic that was. What it gave people a sense of is, 'We're spending all this money, but I'm not getting any help.'"

Last week the White House unveiled plans to impose a fee on about 50 of the nation's biggest banks with assets of $50 billion or more, an attempt to recoup around $90 billion of taxpayers' money.

Still, the president conceded, the bank tax will do little to ease the anger on Main Street. The public sees Wall Street booming once again while the country's unemployment rate remains at 10 percent.

"It doesn't eliminate the sense that their voices aren't heard and that institutions are betraying them," Obama told Stephanopoulos, "and I think that's been expressing itself all year. And they've gotten increasingly frustrated over the course of the year."

Wall Street, meanwhile, has made a public effort to acknowledge Main Street's frustrations, but privately the banks are fighting the administration's crackdown.

The Securities Industry & Financial Markets Association, the main lobbying group for Wall Street, hired a top Supreme Court litigator to look into possibly mounting a legal fight against the president's proposed bank tax on the grounds that it would be unconstitutional by singling out the country's biggest banks.

Banks Take Conciliatory Steps

Publicly, though, the banking titans have taken steps to show they have been chastened by their role in the country's economic collapse.

Earlier Thursday Goldman Sachs set aside nothing for fourth-quarter executive compensation, opting instead to donate $500 million to charity. Total compensation at the banking giant this year was down 20 percent compared to 2007, although employees are still set to rake in an average of nearly $500,000 per person.

At a hearing last week before a congressionally-appointed panel examining the causes of the financial crisis, Goldman Sachs CEO Lloyd Blankfein acknowledged that his firm had made missteps leading up to the 2008 crisis.

"Whatever we did, it didn't work out well," he said.

Bank of America CEO Brian Moynihan said at the hearing, "We understand the anger felt by many citizens."

In his remarks at the White House today, Obama said, "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 common-sense rules of the road that would protect our economy and the American people.

"So if these folks want a fight, it's a fight I'm ready to have."

But whether or not the White House will win that fight – and if even that will be enough to placate Main Street outrage – remains to be seen.

With reports from ABC News' Betsy Stark and Charles Herman.