Obama Wants To Limit Risks That Banks Take
RENEE MONTAGNE, host:
And with the worst of the financial crisis over, President Obama is proposing tougher measures to regulate the banks. Yesterday, he asked Congress to take action to limit the size and activities of some of the nation's largest financial institutions.
And to find out more, we turn now to David Wessel. He's economics editor of the Wall Street Journal, joins us often on this program.
Mr. DAVID WESSEL (Economics editor, Wall Street Journal): Good morning, Renee.
MONTAGNE: Tell us exactly what the president is proposing.
Mr. WESSEL: Two things: one is to expand the existing limits on just how large any bank can get to cover more things. And the second, and the more interesting one actually, is to tell banks that if they're going to come under the federal safety net - deposit insurance, ability to borrow from the Fed, the knowledge that theyll get bailed out if they get in trouble - then they have to stick to basic banking and give up the risky trading for their own accounts or owning hedge funds. It's an approach that Paul Volcker, the former Fed chairman has been promoting loudly for months and months and months, and one that, just until a couple weeks ago, the president's economic team has been distinctly unenthusiastic about.
MONTAGNE: And so why is he doing this now?
Mr. WESSEL: Well, politically, the president clearly is looking for ways to show the people that he's tough on Wall Street, that he's going to do something to prevent the big banks who are so unpopular from putting us through anything like the recent crisis. On the substance, President Obama, Treasury Secretary Tim Geithner said yesterday, that first of all, they want to prevent the American taxpayer from - as the president put it - being held hostage by a bank that's too big to fail. And secondly, they think that banks that want to gamble in the markets, such is their right, should do it with their own money and shouldnt do it with the knowledge that they're being backstopped by the taxpayers. It's not exactly a return to the Depression-era law known as Glass-Steagall, which limited the bank's ability to do things and was repealed in the late '90s. But it's in the spirit of Glass-Steagall, or a second cousin of Glass-Steagall.
MONTAGNE: Now David, the markets went down yesterday. Is that a bad reaction to this and did the banks react to this?
Mr. WESSEL: Well, the markets did fall yesterday. The stock market was down two percent, pulled down by banks stocks because this would definitely the limit banks ability to make money. I mean JP Morgan Chase, one of the biggest banks, lost more than six percent on its stock. And the bankers and the lobbyist for the bankers say look, this kind of trading didnt cause the crisis. This is unwise. It's impractical. It's imprudent. And so they're not happy about it, and there will be a big argument about this. This is not something that is going to necessarily sail through Congress. But the banks are really on the defensive now. I mean just a few days ago, the president proposed a new $9 billion a year fee or tax on them, so they're having a hard time defending themselves right now.
MONTAGNE: And you mentioned, earlier, that the president's economic team, including Treasury Secretary Tim Geithner, not initially enthusiastic about this, came around. Why did they change?
Mr. WESSEL: Well, Larry Summers, the president's economic advisor, Tim Geithner, the Treasury secretary, have argued that the best way to prevent banks from getting into trouble and threatening the system again was to make them hold bigger capital cushions and make sure they had more ready cash. They didnt want to go back to these kinds of ridged rules, the ones that Mr. Volcker has been proposing. But Mr. Volcker's notion drew a lot of support from some big names in finance. The House passed a bill that would've allowed the regulators to do this and the specter of Goldman Sachs and other banks making so much money on trading while they were still being backstopped by the government really, I think, partly changed the argument. We understand that Vice President Joe Biden became an ally of Mr. Volcker. So just before Christmas, Mr. Geithner and Mr. Summers met with Mr. Volcker and apparently they came to an agreement and the president liked the idea.
MONTAGNE: Okay David, yes or no, will it make it through Congress?
(Soundbite of laughter)
Mr. WESSEL: I'm not going to be able to give you a yes or no on that. It depends on what Senate Republicans do.
Mr. WESSEL: Do they want to stop the president or do they want to beat up on the banks?
MONTAGNE: Okay. David Wessel of the Wall Street Journal.
Thanks very much.
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