Fallout: The Financial Crisis

Obama seeks to limit banks’ size, risk

Alisa Roth Jan 21, 2010
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Fallout: The Financial Crisis

Obama seeks to limit banks’ size, risk

Alisa Roth Jan 21, 2010
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TEXT OF STORY

Kai Ryssdal: On pretty much any other day, President Obama’s remarks about banks would have been higher up in this program. Because the president had some more harsh words for Wall Street today, saying the economic crisis started when banks took “huge, reckless” bets in pursuit of quick profits and massive bonuses.

Mr. Obama offered two new ideas for financial reforms this afternoon. One, make big banks smaller, we’ve heard that before. But also, don’t let ’em do what are called proprietary trades. Marketplace’s Alisa Roth explains.


ALISA ROTH: Proprietary trading is when a bank makes money for itself by using its own cash to make big, and often risky, bets. President Obama wants to stop it.

PRESIDENT BARACK OBAMA: Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit.

Here’s the problem: Banks are making those risky bets because they have deposits to back them. If they lose big enough, the banks could fail. And that could pull down the financial system.

Doug Diamond is a finance professor at the University of Chicago’s business school. He says Obama’s going after proprietary trading to limit the kinds of risks banks can take.

DOUG DIAMOND: It became so clear that the government will step in to bail out a systemically important institution that the genie is out of the bottle, and the ability to use this implicit government guarantee as a way to lever up things like proprietary trading is something that needs to be reigned in.

Obama said proprietary trading operations abuse privileges banks have, like access to cheap capital from the Federal Reserve and deposit insurance. That’s given banks an advantage over other investors.

James Brock is an economics professor at Miami University.

JAMES BROCK: I think they’ve been allowed to operate in kind of a twilight zone here, lately, where it’s heads they win and tails we lose.

Obama also wants to limit how big financial institutions can get. It may all be moot, though. With no super majority in the Senate, it’ll be hard to get any of these resolutions passed.

In New York, I’m Alisa Roth for Marketplace.

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