BREAKINGVIEWS-”Volcker plan” for banks may have political legs

By Reuters Staff
January 22, 2010

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

By James Pethokoukis

WASHINGTON, Jan 21 (Reuters Breakingviews) – Wall Street has reason to fear President Obama’s latest bank crackdown plan. The surprise proposal, though fuzzy, suggests that the White House sees bank-bashing as a way to stop the Democrats’ political rot. In an election year, the Republicans might not save the bankers, either.

Following the Democrats’ traumatic defeat in the Massachusetts U.S. Senate race, politics has come to the fore. The fingerprints of the two primary architects of Obamanomics to date — economic adviser Lawrence Summers and Treasury Secretary Timothy Geithner — are noticeably absent from the plan to limit the size and trading activities of banks. The likely ghostwriters are Rahm Emanuel, the White House chief of staff, and political advisor David Axelrod.

With the populist and anti-Wall Street proposal, nicknamed Glass-Steagall lite, the White House is trying to counter the anti-Washington tsunami that contributed to the Democrats’ Massachusetts loss. In that race, some polling data hinted that Obama’s earlier proposal to tax banks may have actually reduced the margin by which Republican Scott Brown won.

The White House would be happier trumpeting a strong economic recovery as the November congressional elections close in. But with the unemployment rate still in double digits, whipping the banks seems a serviceable Plan B. It might also re-energize Obama’s liberal base, currently demoralized over the state of healthcare reform and critical of the current financial reform bill.

Brown’s win means Senate Democrats will need to keep all their own on side and scrounge up at least one Republican to reach the 60-vote supermajority needed for any tough law to pass. But John McCain, for one, has already voiced his support for a return to the strict separation of commercial and investment banking previously enforced by the Depression-era Glass-Steagall Act.

Some other Republicans might also go along, too. The party attacked Obama’s bank tax — but the new plan isn’t a tax. It also benefits from the imprimatur of the newly rehabilitated Paul Volcker, Ronald Reagan’s Federal Reserve chairman, which could help on both sides of the aisle. With no-one in Washington eager to be aligned with Wall Street right now, even flawed legislation could make it onto the books.

CONTEXT NEWS

– President Barack Obama on Jan. 21 proposed stricter limits on financial institutions’ risk-taking that sent U.S. bank shares tumbling.

– Obama laid out rules to prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund. The rules, which must be agreed by Congress, would also bar institutions from proprietary trading operations, unrelated to serving customers, for their own profit.

– He also 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. “We should no longer allow banks to stray too far from their central mission of serving their customers,” Obama told reporters.

– White House release: http://r.reuters.com/jyg94h

– Obama statement text: http://r.reuters.com/nyg94h

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(Editing by Richard Beales and Martin Langfield)

((james.pethokoukis@thomsonreuters.com))

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