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The debate over Obama’s bank plan

Scott Jagow Jan 22, 2010

There seem to be two streams of thought on President Obama’s latest bank regulation proposals. One is, will they actually solve the problems that created the financial crisis? The second — do these measures have any chance of making in through Congress? Oh, and there’s a third. What’s going on with Treasury Secretary Tim Geithner?

First, let’s consider what we saw yesterday as the president announced his proposals with former Fed Chairman Paul Volcker at his side:

A beaming Volcker stood at Obama’s right as the president endorsed his proposal and branded it the “Volcker Rule.” Geithner stood farther away, compelled to accommodate a stance he once considered less effective than his own.

The moment was the product of Volcker’s persistence and a desire by the White House to impose sharper checks on the financial industry than Geithner had been advocating, according to some government sources and political analysts. It was Obama’s most visible break yet from the reform philosophy that Geithner and his allies had been promoting earlier.

One could argue Geithner had his chance at pushing for effective regulation, and now he’s been sent to Time-Out. The president has turned to Volcker, and Geithner is left to express his concerns privately, as Reuters reports:

Geithner is concerned that the proposed limits on big banks’ trading and size could impact U.S. firms’ global competitiveness, the sources said, speaking anonymously because Geithner has not spoken publicly about his reservations.

He also has concerns that the limits do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown, the sources said.

Geithner believes prohibiting specific activities such as proprietary trading, and private equity and hedge fund investing by banks would be less effective than requiring banks to hold more capital in reserve to cover their losses. Publicly, though, he has expressed what I would call tepid support for the president’s plan, saying “just because things seem populist doesn’t mean they’re not the right thing to do.”

So far, the stock markets appear to be saying it’s the wrong thing to do. Presumably, shares are down on the uncertainty of what this would mean for bank profits and the economy overall. Overseas, the reaction is mixed. France welcomed Obama’s proposals. Others, like market analyst David Buick said they can only hurt:

“Here we have, for political expediency, this ill-thought out strategy and it is going to send waves of considerable fear, which we’ve seen all over the world particularly in bank shares,” he told Al Jazeera.

“If you’re going to make banks smaller, you’re doing it at a time when the world’s economy is incredibly brittle and so is the recovery.”

Buik said the proposal is being rushed in to make up for the failures of world governments to come up with stricter regulations.

“For the last 10 months, what on earth have the world’s G20 countries been doing? We’ve had so much rhetoric about what they’re going to do about regulation, and frankly all the countries in the world have done zippo [nothing] and this is a disgrace.

There are many other voices weighing in and the opinions vary widely.

But now that Obama has vowed to “fight” the banks, can he get this through Congress?
The Economics of Contempt blog says no way:

This was a fairly transparent political stunt — the White House needed to do something to take the media’s focus off of health care 24/7, so they flew in Volcker and announced some proposals that sound good to the media. The two Senate staffers I talk to regularly both said their offices were basically ignoring Obama’s proposals, because even if the White House fights for them (which they won’t), Chris Dodd has no intention of inserting them into his committee’s bill. I like how some people think Obama’s proposals represent a fundamental turning point on financial reform, because….well, clearly this is their first rodeo.

Banking analyst Meredith Whitney sees if differently :

Meredith Whitney, the banking analyst who forecast Citigroup Inc.’s dividend cut in 2008, said plans to limit risk-taking at financial companies will probably be approved and may “dramatically” reduce trading profits…

“It is clear to us that the market is not overreacting,” said Whitney, the founder of Meredith Whitney Advisory Group in New York. “The possibility of this proposal going the distance is high.”

What do you think?

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