- The Washington Times - Thursday, January 21, 2010

President Obama ratcheted up his offensive against Wall Street Thursday, outlining new limits on the size of the nation’s largest banks and the extent of their risk-taking in a bid to prevent the failure of one financial giant from threatening the entire economy.

The moves, which would require congressional approval, are part of Mr. Obama’s ongoing effort to overhaul the financial regulatory system by expanding the power of regulators to break up troubled giant banks and create a new agency to protect consumers. It comes one week after he proposed a new tax on large banks to recoup taxpayer bailout money that’s estimated to raise $90 billion over the next decade.

“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,” said Mr. Obama, citing the need to beef up capital and liquidity requirements and identify risks that could cause a system-wide meltdown. “Never again will the American taxpayer be held hostage by a bank that is too big to fail.”

Specifically, Mr. Obama’s proposal would bar a bank or any financial institution that owns a bank from engaging in proprietary trading or trading to making money for itself as opposed to its customers.

Administration officials said the measures are designed to ensure that banks don’t take advantage of implicit taxpayer guarantees on assets such as insured deposits to make profits for themselves.

The White House stressed that the new restrictions would be part of the reform bills slowly moving through Congress, where the House passed legislation and the Senate is drafting its own version.

Of course, the road to passage for the reform bill just got tougher with the Republican victory in the Massachusetts senate race, which erased Democrats’ filibuster-proof majority in the Senate. Sen.-elect Scott Brown has already come out against Mr. Obama’s bank tax proposal.

Mr. Obama echoed tongue-lashings from previous weeks, blaming the financial crisis on the irresponsibility of Wall Street firms “in pursuit of quick profits and massive bonuses.”

“If these folks want a fight, that’s a fight I’m ready to have,” he said.

Mr. Obama made the announcement alongside former Federal Reserve Chairman Paul Volcker, who has long championed the measures as way of ending the strategy under which financial giants such as American International Group Inc. are deemed too entangled in the financial sector to be allowed to collapse when they run into trouble.

“There’s no doubt in the last crisis we just went through there were a whole bunch of entities that were of forms that were perceived as too big to fail and threatened the system with their collapse, and that’s precisely what we’re trying to end,” one senior administration official said.

The restrictions appear to revive at least part of the Depression-era Glass-Steagall Act, which separated commercial banking and investment banking to ensure that the latter could not take advantage of depositor funds money for riskier investments and business lines. Those provisions of the law were repealed in 1999.

“This prohibition says you can choose to engage in proprietary trading or you can choose to own a bank, but you can’t do both. You have to make the basic choice,” another senior administration official said.

Treasury Secretary Timothy Geithner, House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd also joined Mr. Obama at Thursday’s White House event.

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