President Obama stepped up his populist-tinged offensive against Wall Street Thursday by proposing new limits on the size of the nation’s banks and the scope of their risk-taking and profit-making, setting up a battle in Congress.
News of the proposed restrictions sent stock markets plunging. They 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.
The president announced the plan one week after proposing a tax on large banks to recoup taxpayer bailout money.
“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 systemwide meltdown.
“Never again will the American taxpayer be held hostage by a bank that is too big to fail,” he declared.
Mr. Obama’s proposal would bar a commercial bank or any financial institution that owns a commercial bank from engaging in proprietary trading, or trading on its own behalf as opposed to its clients.For example, commercial banks that invest in hedge funds or private equity firms to make profits would be forced to either stop the practice or give up their banking business.
The proposed reforms appear similar to the Depression-era Glass-Steagall Act, which separated commercial banking and investment banking. That provision was repealed in 1999 by the Republican-led Congress with the approval of President Clinton.
The stock market spiraled downward on news of Mr. Obama’s proposal. The Dow Jones Industrial Average fell 213 points to 10,389, its sharpest decline since October. The financial industry, which has been critical of Mr. Obama’s other financial proposals, said the measures would inhibit lending and job growth.
“The administration’s new proposal is inconsistent with achieving these goals,” said Steve Bartlett, president and chief executive officer of the Financial Services Roundtable, which represents the largest Wall Street firms. “The proposal will restrict lending, increase risk, decrease stability in the system and limit our ability to help create jobs.”
Administration officials said the measures are designed to ensure that banks don’t take advantage of taxpayer guarantees on assets such as insured deposits to make profits for themselves.
But the moves also highlight the administration’s reaction to fomenting public anger over excesses in the financial sector, where bank executives continue to collect lucrative bonuses while the national unemployment rate is stuck near 10 percent.
Keeping with the populist tongue-lashings he has directed at Wall Street in recent weeks, Mr. Obama blamed the financial crisis on the irresponsibility of firms “in pursuit of quick profits and massive bonuses.”
“I welcome constructive input from folks in the financial sector. But what we’ve seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and common-sense rules of the road that would protect our economy and the American people,” he said. “So if these folks want a fight, that’s a fight I’m ready to have.”
Republicans argued that the additional regulation would create uncertainty.
“The president’s proposal will do nothing to help put Americans back to work or help small businesses hire more workers, but it will add to the environment of uncertainty that Democrats in Washington have created,” said House Minority Whip Eric Cantor, Virginia Republican.
“Tens of millions of Americans are begging President Obama, Speaker [Nancy] Pelosi, and [Majority Leader] Harry Reid to stop the wild spending and focus on jobs and the economy, and it’s shocking that following the election results in Virginia, New Jersey and now Massachusetts, Democrats in Washington continue to ignore them.”
The White House stressed that the new restrictions would be part of a broader effort on Capitol Hill, but its prospects are uncertain - as is the tax proposal announced last week designed to raise about $90 billion over the next decade. The House passed a sweeping bill last year, but the effort has stalled in the Senate, where Democrats no longer have a filibuster-proof majority as a result of Republican Scott Brown’s election victory in Massachusetts.
Democratic leaders welcomed the idea.
“The president’s proposals, which prevent banks from taking advantage of consumer deposits by placing risky bets and limiting the excessive growth of large financial firms, are what taxpayers demand and deserve,” Mrs. Pelosi said. “Congress will continue to work with the president to enact common-sense reforms to our financial system, so that taxpayers will never again have to bail out Wall Street.”
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. Mr. Volcker is serving as chairman of the President’s Economic Recovery Advisory Board.
“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 White House said Mr. Obama’s proposals are different from the Glass-Steagall Act, which focused on securities investments that aren’t posing the greatest risk to the current economy. Instead, Mr. Obama’s proposal would target investments in hedge funds, private equity funds or any other trading not on behalf of a bank’s clients, said Austan Goolsbee, chief economist of the Economic Recovery Advisory Board.
“We want to try to get banks back to the core function of relating to clients and not taking excess risky activities in the financial system,” Mr. Goolsbee said.
Treasury Secretary Timothy F. Geithner, House Financial Services Committee Chairman Barney Frank and Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd also joined Mr. Obama at Thursday’s White House event.