Geithner aired concern on bank limits-sources
Fri Jan 22, 2010 2:02am GMT
* Geithner has concerns over proposed bank limits–sources
* Treasury chief worried about competition, root of crisis
* Geithner tells PBS that limits not politically motivated (Adds comments from Geithner and Summers, analyst comment)
By Karey Wutkowski and Steve Eder
WASHINGTON/NEW YORK, Jan 21 (Reuters) – U.S. Treasury Secretary Timothy Geithner has expressed some skepticism behind closed doors about the broad bank limits proposed on Thursday by his boss, President Barack Obama, according to financial industry sources.
The sources, speaking anonymously because Geithner has not spoken publicly about his reservations, said the Treasury chief is concerned the proposed limits on big banks’ trading and size could impact U.S. firms’ global competitiveness.
He also has concerns that limits on proprietary trading do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown, the sources said.
But a White House official said Geithner was on board with Obama’s economic team behind the proposals.
Geithner and Lawrence Summers, the director of President Barack Obama’s National Economic Council, worked closely with Paul Volcker, who heads a panel of outside advisers, in developing the proposals, the official said.
“The plan was submitted to the president with a unanimous recommendation from the economic team,” the official said.
In a television interview, Geithner said the proposal was driven by a desire to ensure a stable financial system, not by politics.
Geithner told PBS NewsHour the Obama administration decided to unveil the proposals months after its original sweeping financial reform plan to bring “a little more clarity” to how big banks could be reined in. Geithner had backed a proposal last fall to give regulators power to curb a firm’s size.
Summers, in an interview with CNBC, said the latest proposal was written before a Democrat, Martha Coakley, lost a closely watched race for the Massachusetts Senate seat on Tuesday. Obama had painted her opponent, Republican Scott Brown, as a friend of Wall Street.
Obama’s proposals would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.
He called for a new cap on the size of banks in relation to the overall financial sector that would take into account not only bank deposits, which are already capped, but also liabilities and other non-deposit funding sources.
The proposed rules also would bar institutions from proprietary trading operations that are for their own profit and unrelated to serving customers. For details [ID:nN21200151]
The administration had already sharpened its rhetoric against Wall Street where the announcement was met with disdain. Bank shares slid and the dollar fell against other currencies. [ID:nN21145261]
The proposals were largely driven by Volcker, a former Federal Reserve chairman who for more than a year has advocated curbs on big financial firms to limit their ability to do harm.
The White House official said Obama’s economic team considered the concern that proprietary trading was not at the heart of the problems that fueled the financial crisis.
But it concluded that reform needed to be about more than just fighting the last war, it needed to address sources of future risk as well, the official said.
Lawrence White, a professor at New York University’s Stern School of Business and a former regulator, said Obama’s proposals were “a solution to the wrong problem.”
“They have this rhetoric that it was proprietary trading that was the problem,” White said. “That’s wrong.”
Obama has recently tried to capitalize on populist anger against the big banks, proposing last week a major tax on banks to recoup taxpayer losses related to the bailout.
Underscoring the high level of public anger at banks, a majority of 1,006 Americans surveyed in a Thomson Reuters/Ipsos poll said executive pay was too high. [ID:nN21222779]
Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution, said he didn’t know Obama’s motivations, but thought his move was “smart politics.”
“Everybody hates the bankers now and when you come out with something saying we are going to keep them from getting bigger and taking outrageous risks, of course it comes out favorable,” Elliott said. “I do have some concerns about the public policy aspects.” (Reporting by Karey Wutkowski in Washington and Steve Eder in New York with additional reporting by Jeff Mason and Glenn Somerville; Editing by Kenneth Barry and Diane Craft, Gary Hill)