New Bank Rules Sink Stocks

Obama Proposal Would Restrict Risk-Taking by Biggest Firms as Battle Looms 

European Pressphoto Agency

From left, bank chiefs Lloyd Blankfein, James Dimon, John Mack and Brian Moynihan are sworn in on Capitol Hill earlier this month to testify before the Congressional Financial Crisis Inquiry Commission, which is investigating the causes of the financial crisis.

WASHINGTON—President Barack Obama proposed new limits on the size and activities of the nation's largest banks, pushing a more muscular approach toward regulation that yanked down bank stocks and raised the stakes in his campaign to show he's tough on Wall Street.
With former Federal Reserve Chairman Paul Volcker at his side, Mr. Obama said he wanted to toughen existing limits on the size of financial firms and force them to choose between the protection of the government's safety net and the often-lucrative business of trading for their own accounts or owning hedge funds or private-equity funds. Mr. Volcker has been an outspoken advocate of such rules; until recently Mr. Obama's top economic advisers, including Treasury Secretary Timothy Geithner and Lawrence Summers, were less than enthusiastic.
"Never again will the American taxpayer be held hostage by a bank that is too big to fail," Mr. Obama said Thursday, two days after voters crimped his ability to pursue his agenda by sending a Republican to the Senate to fill a vacancy created by the death of Edward M. Kennedy. The election deprived Democrats of the 60 votes often needed to get major measures through the Senate.

Wall Street is reeling following the White House's financial reform proposals. The News Hub panelists argue the merits of the effort.

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• Analysis: Volcker Returns to Center Stage
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• Economists React: 'Wrong Solution' or 'Good Idea'?
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• Real Time Econ: Battle Just Heating Up
• Video: Obama News Conference

Administration officials said they weren't trying to resurrect the Depression-era law—known as Glass-Steagall—that strictly divided commercial banks from the business of underwriting securities. Nor would their proposals force existing financial firms to downsize, officials said.
If accepted by Congress, the Obama proposals could force significant changes in how the nation's biggest banks do business. The specter of new profit-crimping regulation battered bank stocks Thursday, dragging down the Dow Jones Industrial Average by 213.27 points, or 2%, to 10389.88. Some financial stocks sank by more than 5%, though they recovered slightly after Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said the new rules would take effect over three to five years, not immediately. J.P. Morgan Chase & Co.'s stock was the hardest hit, sinking 6.6%.
The fate of the Obama proposal is uncertain. The House already has passed a provision that would give regulators new authority to limit the scope and scale of banks. Congressional passage now depends primarily on Senate Republicans. Several Republican senators expressed skepticism about the Obama proposal Thursday. "Let's solve problems," said Arizona Republican Sen. Jon Kyl. "Let's not be finding a bogeyman so that we can turn public attention away from what they're doing wrong in the administration."
But in a political environment decidedly hostile to big banks, Democrats might need only a few Republican votes to enact a variant of what Mr. Obama called "the Volcker rule." Sen. John McCain, the Arizona Republican, said the White House appears to be moving closer to a proposal he is co-sponsoring that would reinstate restrictions on banks that were repealed in the late 1990s. "It seems to me that a number of the proposals [Mr. Obama] has move in that direction," Sen. McCain said, "but I haven't had a chance to examine the details."
Big banks and their trade groups attacked the Obama proposals as unnecessary and unwise. "If people are focused on things that caused or were real contributors to the financial crisis, it wasn't trading," said David Viniar, chief financial officer at Goldman Sachs.
Over the past several years, banks have bulked up their profits in areas far beyond taking deposits, making loans and trading stocks and bonds on behalf of customers.
Some have bought or sponsored hedge funds. Others have moved to invest their own money in the markets.
After the collapse of Lehman Brothers and the rescue of American International Group in the fall of 2008, investment banks Goldman Sachs and Morgan Stanley formally became banks—giving them access to Fed loans and federal guarantees of their borrowing in financial markets.
When the crisis ebbed, Goldman and some other banks were able to borrow at low rates and turn profits trading for their own accounts. This gave Mr. Volcker and his allies, who include Vice President Joe Biden, new fuel for their argument that government-backed banks should be prevented from taking big trading risks.
"The key issue is that institutions that are getting a backstop from the taxpayer shouldn't be able to make a profit off their own investing," said Austan Goolsbee, a White House economist who staffs the presidential advisory board Mr. Volcker chairs.

Looking Back: Glass-Steagall

Read the Journal's coverage of the early days of the 1933 Glass-Steagall Act, which first walled off commercial banks from investment banks.

• Bill to Unify Deposit Banks; Glass Measure Will Provide Federal Insurance, Segregation of Different Types of Banking
  04/03/1933
• Morgan Spends 2nd Day on Stand; Disclosure List of Prominent Clients Features Evidence at Probe; Got Stock Under Market
  05/25/1933
• Bank 'Insurance'; Congress Leaning Toward Immediate Deposit Guarantees Without U.S. Supervision; Reserve Members Object
  05/27/1933
• Self Regulation Urged for Banks; Brooklyn Trust Head Lays Down Five Rules for Insuring Confidence
  06/28/193

Bank executives scrambled Thursday to interpret the proposals, particularly their effect on areas where bank capital is intermingled with client funds. The new rules would, for instance, likely force J.P. Morgan to shed its One Equity Partners private-equity business, which invests the firm's money. Disentangling Goldman's private-equity business, however, could be trickier because it invests its own money in the same funds that clients invest in.
Under the Obama proposal, banks that take federally insured deposits or have the right to borrow from the Fed would be prohibited from owning, investing in or sponsoring hedge funds or private-equity firms. "You can choose to engage in proprietary trading, or you can own a bank, but you can't do both," an administration official said.
The president also called for expanding the reach of a 1994 law that forbids banks from acquiring another bank if the deal would give it more than 10% of the nation's insured deposits. He would expand that limit to cover other types of funding—such as banks' short-term borrowing from financial markets—and perhaps put a cap on the share of assets any one firm could hold.
The Thursday announcement is the latest move by the White House to target Wall Street and banks. Earlier this month, the president proposed a new fee on large banks and insurance companies that would raise $90 billion over 10 years, ostensibly to offset the costs of the bailout of financial firms and auto giants.

—Michael R. Crittenden and Susanne Craig contributed to this article.

WORLD FOREX: Dollar Trumped By Yen As Risk Flees Markets

By Bradley Davis 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--The dollar dropped sharply against the yen Thursday as concerns over proposed U.S. banking regulations, worry over Greek sovereign debt and a possible slowing of Chinese growth led investors toward the safe-haven Japanese currency.
The dollar ended the day trapped near day-earlier levels against the euro after a day of extremely choppy trading. The greenback overnight sailed to its highest level against the euro since July before sinking against the common currency after the announcement of the bank regulations proposed by the Obama administration.
"Right now, a lot of people are probably viewing [the bank regulation plan] as potentially negative for the U.S.," denting the dollar, said Brian Kim, currency strategist at UBS in Stamford, Conn.
"But all the other things out there have not gone away," Kim said, referring to continued concerns over Greece's sovereign debt and worry that China could move to slow economic growth, which could affect the global economic turnaround.
Late Thursday in New York, the euro was at $1.4097 from $1.4102 late Wednesday, according to EBS via CQG. The dollar was at Y90.33 from Y91.23, while the euro was at Y127.27 from Y128.69. The U.K. pound was at $1.6195 from $1.6285. The dollar was at CHF1.0426 from CHF1.0443.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 78.395 from 78.369. It earlier hit 78.814, its highest level since Sept. 2.
As a result, Deutsche Bank's PowerShares US Dollar Index Bearish (UDN) exchange-traded fund was down 0.04% from late Wednesday, while its PowerShares US Dollar Index Bullish (UUP) was up 0.04%. The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of ICE's Dollar Index.
Pressuring the dollar against the euro could be investor worry over the proposed banking regulations, which could derail a nascent economic recovery, said Michael Mahoney, vice president of foreign-exchange trading at Union Bank in Los Angeles.
To see the euro's moves against the dollar, please see:
http://dowjoneswebservices.com/chart/view/3317
The bank regulation plan would force institutions to choose between commercial banking and proprietary trading for their own profit, while seeking to limit the size of megabanks.
Though the proposal appears to move the U.S. back toward Depression-era barriers between commercial and investment banking, White House officials denied they are pushing for a return of the Glass-Steagall Act, which was repealed in 1999.
The Dow Jones Industrial Average sank as reverberations of the proposed regulation hit the markets, losing more than 2% by late afternoon.
Despite the euro's afternoon rebound against the dollar, the common currency remained sharply lower against the yen, losing more than 1%.
"The overall net move on the day, you see things consistent with risk aversion," with the Greece situation and possibly sagging Chinese growth weighing on growth-sensitive currencies, said Daniel Katzive, foreign- exchange strategist at Credit Suisse in New York.
Growth-sensitive, commodity-backed currencies, such as the Australian and New Zealand dollars, declined over fears that China's putting a brake on economic growth could derail the global economic turnaround.
The dollar's had rallied overnight when China reported its gross domestic product had expanded at 10.7% in the fourth quarter, up from 9.1% in the third quarter. Beijing also disclosed that inflation had risen as high as 1.9%, instead of increasing to only 1.7% as expected.
The Chinese data signal that "tighter policy is just around the corner as Beijing seeks to prevent the economy from overheating," RBC Capital strategists wrote in a note to clients.
A slew of negavive news out of the euro zone, including festering concerns over Greek sovereign debt, sent the common currency during overnight trading to $1.4029, its lowest level since July 30.
A spokeswoman for the European Commission, the European Union's executive arm, said Thursday she isn't aware of any financial bailout packages being arranged for Greece, which struggles with deficit spending and concern over its credit-worthiness.