By Pete the Banker
In the aftermath of the Scott Brown victory in Massachusetts , Obama moved today to capitalize politically on voter anger over Financial Institutions‘ profits and Executive bonuses.
He is proposing new restrictions on the size of Financial Institutions and their proprietary trading. His first restriction is aimed at the scope Bank activities. Retail Banks with insured deposits and access to emergency funds through the Federal Reserve, would no longer be allowed to engage in “proprietary” trading nor own private equity or hedge funds. The second part of the Obama proposal aims at restricting a Banks size by placing a 10% cap on an individual Bank’s national market share of consumer deposits. The four largest banks now hold more than half of the industry’s assets, a direct result of government intrusion into the industry over the past two years.
The Economist suggests (here) these proposals are “more radical” than those proposed by the International Bank Supervisors through the Basel Committee establishing standards for International Central Banks Policies and Capital Requirements for Developed Countries. () This is truly ironic since the Basel Accords basically created the market for Credit Default Swaps and trading amongst the Banks in the early 1990’s.
In the recent past, Obama has maintained that a healthy Banking System and its lending are crucial to a growing economy and decreasing unemployment. Yet in the past few weeks Obama has castigated the Commercial Banks for not lending, proposing a punitive capital tax on their liability and reserve funds.
He is now proposing these new restrictions in addition to the earlier tax proposal at a time when the capital/credit markets continue to show weakness with limited transaction activity. The tax on Bank capital reserves will inhibit lending rather than promote it. Not only will the current proposal by the President imperil the ability of the major banks to compete internationally with larger foreign banks, but it will do little to address the causes of the original capital market collapse.
“Mr. Obama also keeps peddling the illusion that the entire crisis was caused by the bankers. But the root cause was a credit mania, courtesy of the Federal Reserve. The mania was concentrated in the housing market, courtesy of Congress and several Presidential Administrations. More fundamentally, even if the logistics can be mastered, the President’s plan would not have prevented the credit chaos of 2008. Bear Stearns was not a bank, could not borrow from the Fed’s discount window and wasn’t even all that big, yet the government still wouldn’t let it fail.” (here)
And the residential capital markets had collapsed during the Summer of 2007, six months prior to the Bear Stearns failure. These measures will have limited impact on the earlier mortgage loan excesses especially those of Banks, Regional Banks, Fannie Mae and Freddie Mac.
The coercive activity of the Administration toward the Banking Industry threatens to impede the health of the Banks and their ability to continue to strengthen their capital positions, subsequently resulting in the contraction of their ability and willingness to lend both in this country and internationally. John Courson, President of the Mortgage Bankers of America stated,
This is just one more obstacle with which banks are going to have to contend,” Courson said. “The return to health of the housing industry depends on the growth of the economy which depends on the ability and willingness of banks to lend. This proposal could slow economic recovery and reduce the lower the reduction of unemployment by directly impacting the earnings of banks which are struggling to return to profitability. The one thing the economy does not need right now is more instability and that is the risk of this proposal.” Courson added that the mortgage market would likely be “severely impacted” by the unwillingness of banks to lend. (here)
Given the continuing expressions of concern about a fledgling economic recovery, high unemployment levels and the emergence of a double dip recession, is this latest White House political initiative wise? Isn’t it a dangerous game to target the Banks as scapegoats in order to rebuild the Presidents political capital at the tremendous expense of imperiling Banks’ ability to function, reducing their ability to lend and undermining the tepid and infant economic rebound?
This proposal may simply be political rhetoric, but if Obama intends to pursue and implement these additional constraints he may be playing a particularly dangerous game!!
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