Our source, speaking anonymously, Geithner hasn’t yet spoken publicly on his reservations, said the Treasury chief is concerned that the proposed limits on big banks’ trading and size could impact global competitiveness. Geithner also has concerns that limits on proprietary trading do not necessarily get at the root of the problems and excesses that fuelled the recent financial crisis. However, a White House official has stated that Geithner is on board with Obama’s economic team, and prepared to tow the Presidents Line.
Geithner and Lawrence Summers, the director of President Barack Obama’s National Economic Council, worked closely with Paul Volcker, who heads a panel of outside advisers, in developing the proposals, the official said.
“The plan was submitted to the president with a unanimous recommendation from the economic team,” the official said.
In a television interview, Geithner said the proposal was driven by a desire to ensure a stable financial system, not by politics.
Geithner told PBS NewsHour the Obama administration decided to unveil the proposals months after its original sweeping financial reform plan to bring “a little more clarity” to how big banks could be reined in. Geithner had backed a proposal last fall to give regulators power to curb a firm’s size.
Summers, in an interview with CNBC, said the latest proposal was written before a Democrat, Martha Coakley, lost a closely watched race for the Massachusetts Senate seat on Tuesday. Obama had painted her opponent, Republican Scott Brown, as a friend of Wall Street.
Obama’s proposals would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund. The President called for a new cap on the size of banks in relation to the overall financial sector that would take into account not only bank deposits, which are already capped, but also liabilities and other non-deposit funding sources. The proposed rules also would bar institutions from proprietary trading operations that are for their own profit and unrelated to serving customers.
The administration had already sharpened its rhetoric against Wall Street where the announcement was met with disdain. Bank shares slid and the dollar fell against other currencies. These proposals have largely been driven by Mr Volcker, a former Federal Reserve chairman who for more than a year has advocated curbs on big financial firms to limit their ability to do harm.
The White House official said Obama’s economic team considered the concern that proprietary trading was not at the heart of the problems that fueled the financial crisis. But it concluded that reform needed to be about more than just fighting the last war, it needed to address sources of future risk as well, the official said.
Lawrence White, a professor at New York University’s Stern School of Business and a former regulator, said Obama’s proposals were “a solution to the wrong problem.”
“They have this rhetoric that it was proprietary trading that was the problem,” Mr White said. “That’s wrong.”
Obama has recently tried to capitalise on populist anger against the big banks, proposing last week a major tax on banks to recoup taxpayer losses related to the bailout. Underscoring the high level of public anger at banks, a majority of 1,006 Americans surveyed in a Thomson Reuters/Ipsos poll said executive pay was too high.