It’s “Volcker lite“…
I’m very interested in any proposal that has the banks whinging like this Bloomberg video of Rob Nichols, the president of the Financial Services Forum… (an excellent rebuttal to Mr. Nichols arguments from the Epicurean Dealmaker)
Here is the German CEO of Deutsche Bank commenting on regulations proposed for US financial markets. He doesn’t like them either.
Although President Obama has put forward only the broadest outline of some proposals to rein in risk taking at banks it has caused some heat on Wall Street… we should think of falls in the Dow as a gauge of the potential effectiveness of a Washington proposal… the harder the drop in the Dow the more effective the proposed law or regulation…
Whether elected politicians have the nerve to stand up against Wall Street is another question… Mr. Nichols says in the Bloomberg video that they are already starting to have “conversations on the Hill”… it’s the start of a new lobbying rodeo…
Goldman Sachs, for example, employs a stable of its own lobbyists that cover the Congress and various regulators. Here is how they were deployed in 2008… Goldman filed reports showing they spent $3,310,000 on this activity…
No. of Reports Listing Agency (max of 11)*
- US House of Representatives 3
- US Senate 3
- Commodity Futures Trading Commission 1
- Dept of Transportation 1
- Federal Reserve System 1 (note all the various firms lobbying the Fed)
- Securities & Exchange Commission 2
Here is the reporting on outside lobbying firms that Goldman Sachs paid in 2008 to do political lobbying on their behalf from opensecrets.org:
- Duberstein Group $400,000
- Baptista Group$270,000
- Capitol Tax Partners $240,000
- ML Strategies $200,000
- Williams & Jensen $160,000
- Rich Feuer Group $130,000
- Angus & Nickerson $90,000
- RR&G $80,000
- Gephardt Group $70,000
- Law Office of John T O’Rourke $60,000
- Bingham McCutchen LLP $50,000
- Vinson & Elkins $40,000
- Washington Tax Group $30,000
- Sullivan & Cromwell $30,000
- Total outside lobbying $1,930,000
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Tories seek to follow US lead on prop trading
January 21 2010 22:53
The Conservatives are likely to follow US president Barack Obama’s lead and introduce similar trading curbs for banks based in the City if elected, George Osborne, the shadow chancellor, said Thursday night.
The opposition party fired a warning shot across the bows of financial institutions including Barclays, Deutsche Bank, Credit Suisse and UBS, saying the Obama crackdown on proprietary trading was “definitely something we think needs to be done”.
“Gordon Brown has repeatedly opposed the specific action which President Obama has today announced. He now looks very isolated,” said Mr Osborne.
The UK government said it would look “very closely” at the American proposals but it would not automatically follow suit.
Chancellor Alistair Darling has previously ruled out a “Glass-Steagall approach”, saying it was “right for the 1930s” but not for the 21st century. However, Mr Obama’s recommendations would not see an exact repeat of the Glass-Steagall act, which was a total separation of investment and retail banking. As such the UK government will wait before making its position clear on the new proposals.
Treasury officials said it would take several weeks before the full details were clear, during which time there would be close conversations between London and Washington. Lord Myners, City minister, will be leading a meeting on Monday, attended by representatives from G7 countries, where the proposals are expected to be discussed.
There was confusion and shock among bank chiefs Thursday, given the scant details of how the crackdown would work in practice, particularly for non-US banks. “If the Obama levy is a guide to how this will be applied, it could be very damaging,” said a board member at one big European bank. Speaking ahead of Mr Obama’s announcement, Josef Ackermann, Deutsche Bank’s chief executive, characterised plans to split up banks or limit their range of activities as “misguided”.
Foreign banks with proprietary trading operations would be caught by the US reforms. The new rules would ban the use of a bank’s own capital for hedge fund or private equity investment, or for trading unless it was directly connected to client activity.
However, some foreign banks believe they could escape the ban by switching operations from Wall Street to London or continental Europe.
Bankers told the Financial Times that, in spite of recent moves by London and Paris to crack down on bonuses, they would look at the feasibility of relocating some proprietary trading businesses to Europe.
Shares in Barclays tumbled 6 per cent, in line with falls among US banks, after analysts said its proprietary trading revenues represented 5-10 per cent of all trading revenues.
Last year it attracted controversy when it recruited a team of star proprietary traders from JPMorgan on multi-million pound pay packages.
The bank insisted Thursday night that so-called “pure” proprietary trading – or trading separate from market making for its clients – was an “absolutely minute” part of its business.
Many European banks say pure proprietary trading amounts to only 1 or 2 per cent of revenues, compared with more than 10 per cent for Goldman.
http://www.ft.com/cms/s/0/34722f64-06de-11df-b058-00144feabdc0.html?nclick_check=1
Jan. 22 (Bloomberg) — President Obama’s plan to curb risk- taking by banks hinges on how rigidly regulators define proprietary trading at firms such as Goldman Sachs Group Inc. and JPMorgan Chase & Co.
Goldman Sachs, which generated at least 76 percent of 2009 revenue from trading and principal investments, gets the “great majority” of transactions from customers, according to Chief Financial Officer David Viniar. About “10-ish percent” of the New York-based firm’s revenue comes from “walled-off proprietary business that has nothing to do with clients,” he said on a conference call yesterday.
The plan to curb proprietary trading at banks is among proposals that Obama said yesterday will strengthen the U.S. financial system and help prevent a repeat of the credit crisis. Other restrictions would prohibit banks from investing in hedge funds and private companies and put new limits on banks’ borrowings, according to the White House.
JPMorgan, Goldman Sachs, Citigroup Inc. and Bank of America Corp. tumbled more than 4 percent in New York trading, leading the S&P 500 Financials Index down 3 percent, its biggest decline since October. All the banks are based in New York except for Bank of America, which is in Charlotte, North Carolina.
Volcker’s Push
The White House defines proprietary trades as those not done for the benefit of customers, according to a senior administration official. Regulators would have the power to ask banks whether certain trades are related to client business, the official said. If they’re not, the regulators could order firms to exit the positions.
At banks such as Goldman Sachs, drawing the line isn’t easy, Viniar said.
“If a client wants to sell us a security, we’ll buy the security,” Viniar said. “That risk, which is principal risk, ends up on our balance sheet. It’s the great bulk of what we do all day long in all of our products for all our clients.”
Obama also proposed expanding a 10 percent cap on banks’ market share of deposits to curtail increases in liabilities. He said he wants to protect taxpayers from further bailouts, such as those provided through the $700 billion Troubled Asset Relief Program, passed under former President George Bush in late 2008. Obama voted for the program.
Obama said he wants to make sure banks don’t “benefit from taxpayer-insured deposits while making speculative investments.” He stopped short of calling for a reinstatement of the Depression-era Glass-Steagall Act, which before its repeal in 1999 banned the mixing of commercial banking and securities business.
‘Trade for Profit’
“Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers,” Obama said. He spoke at the White House, standing next to 82-year-old Paul Volcker, the former Federal Reserve chairman who’s now advising the administration and has spoken on the need to limit risk-taking at deposit-funded banks.
“If financial firms want to trade for profit, that’s something they’re free to do,” Obama said. “Indeed, doing so responsibly is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private-equities funds while running a bank backed by the American people.”
Administration officials didn’t say whether the proposals would apply to the U.S. subsidiaries of foreign banks. Obama’s Jan. 14 proposal to tax financial firms would apply to foreign operations in the U.S.
Barney Frank’s View
House Financial Services Committee Chairman Barney Frank told Bloomberg Television he would support the limits, though he would like to see them implemented over five years instead of immediately.
Senator Christopher Dodd, the Banking Committee chairman who’s leading efforts to draft regulatory overhaul legislation, offered to give the proposal “careful consideration.”
Morgan Stanley, which lost $1.05 billion on principal investments last year on top of $4.15 billion in 2008, has mostly shut down trading operations it deems “proprietary,” Chief Financial Officer Colm Kelleher said on a conference call this week.
“We monitor risk across all of the businesses and my view is, we’re in a risk-taking industry,” Kelleher said.
‘Integrated’ Trading
“If you’re a money center bank and you engage in global businesses, you need proprietary trading to offset the risk that you’re exposing yourself to when you’re serving your clients,” said Peter Sorrentino, a senior portfolio manager at Cincinnati- based Huntington Asset Advisors, which oversees $13.8 billion. “You don’t know when you cross that line and get into proprietary trading.”
Goldman’s Viniar made that point yesterday when discussing the firm’s private-equity business and trading operations that are clearly proprietary.
“It’s very integrated,” he said on a conference call with investors yesterday. “There are a lot of our very important clients invested in our business. We invest alongside other clients of the firm and we invest in clients to help them grow.”
Risk-taking on behalf of clients is “basic to the operation of the securities markets” and “central to our economy,” said Bruce Foerster, who left Lehman Brothers Holdings Inc. as a managing director in 1994 to found Miami- based South Beach Capital Markets.
Citigroup’s Bailout
“Investment banks traditionally, among other things, were suppliers of secondary market liquidity to institutional investors,” Foerster said. “That often required using the firm’s balance sheet to fill one side of the trade if there wasn’t a natural buyer. That’s a function the public mostly does not understand.”
Citigroup had to get a $45 billion bailout after a record $28 billion 2008 loss that stemmed from subprime-mortgage- related “collateralized debt obligations” and other investments made at least partly to facilitate customer business. Last year, Citigroup generated at least $3.93 billion of revenue from principal investments, or about 5 percent of overall revenue, according to the bank’s financial statements. In 2008, it lost $22.6 billion in that area.
Citigroup’s Phibro Sale
Last October, Citigroup sold its Phibro LLC energy-trading business, which operated independently from the bank’s main trading desk and had brought in average pretax earnings of $371 million during the past five years. At the time, the bank said in the statement that the sale was “consistent with Citi’s core strategy of a client-centered business model.” Citigroup’s “client-facing” commodities trading business wasn’t affected, according to the statement.
Stephen Cohen, a Citigroup spokesman, declined to comment.
JPMorgan Chase derived $9.8 billion of revenue from principal investments in 2009, or 9.8 percent of the firmwide total, according to its financial statements. The prior year, the bank lost $10.7 billion on principal investments. Bank spokesman Joseph Evangelisti declined to comment.
Securities firms that converted to bank-holding companies during the financial crisis might simply decide to “de-bank” if the Obama trading restrictions are too onerous, said Lawrence Kaplan, an attorney at Paul Hastings Janofsky & Walker LLP in Washington who specializes in bank regulation. Goldman Sachs and Morgan Stanley obtained the status partly to gain access to low- cost Federal Reserve funding.
“There’s a process in which you can de-bank, which means you have to get rid of your bank,” Kaplan said. “There could be an ironic outcome by restructuring these guys back to the way they were pre-crisis, which I’m sure is not the intended outcome.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKJuUZlozezE&pos=1
President Obama and Democrats have settled on demonizing Wall Street as a campaign theme for November’s elections. If history is any guide, Mr. Obama and New York Senator Chuck Schumer will now persuade Wall Street to underwrite this campaign. Ah, the politics of hope and change. How refreshing.
Phony populism aside, yesterday Mr. Obama introduced his first serious idea into the debate on reforming the financial system. In calling for an end to proprietary trading at firms with a federal safety net, the President showed that he now understands an important principle: Risk-taking in the capital markets is incompatible with a taxpayer guarantee.
Under the President’s still-sketchy plan, firms that hold government-insured deposits or are eligible to receive cheap loans in an emergency from the Federal Reserve would not be able to trade for their own accounts. The firms could facilitate customer orders as brokers have always done and continue to underwrite new issues of stocks and bonds, but they could not make bets with their own capital or own or invest in hedge funds.
Yesterday’s announcement is a critical departure from the reform plan Mr. Obama introduced last year—largely incorporated in the House and Senate bills written by Barney Frank and Chris Dodd. Those plans all sought to expand the universe of too-big-to-fail companies eligible for taxpayer rescue. Mr. Obama has at last joined the most important policy discussion: How to eliminate the moral hazard now embedded in the U.S. financial system. Political assaults on banker compensation have done nothing to address this core problem that enables gargantuan bonuses.
The days ahead will demonstrate whether Mr. Obama is serious, or if this is merely a political tactic to encourage Republicans to defend big banks. If he’s serious, he will add to his plan a taxpayer exit strategy from the most expensive bailouts—at Fannie Mae and Freddie Mac.
He’ll also soon realize that while his plan raises the right questions, its details will be crucial. Since there’s a counterparty on the other end of every trade made by Goldman Sachs, it won’t always be easy to discern trades made for customers versus those made for Goldman.
More fundamentally, even if the logistics can be mastered, the President’s plan would not have prevented the credit chaos of 2008. Bear Stearns was not a bank, could not borrow from the Fed’s discount window and wasn’t even all that big, yet the government still wouldn’t let it fail. Under Mr. Obama’s new rules, Goldman might simply decide to sell its bank—yet investors and its own traders would still assume it is too big to fail. That problem still needs to be addressed.
Mr. Obama also keeps peddling the illusion that the entire crisis was caused by the bankers. But the root cause was a credit mania, courtesy of the Federal Reserve. The mania was concentrated in the housing market, courtesy of Congress and several Presidential Administrations.
If we are going to have a Fed and a political class as reckless as we have, then we need a more comprehensive answer to financial risk. Bankruptcy for risk-takers who bet wrong is the best option. Barring that, strict limits on margin and leverage, especially for holders of insured deposits, can be helpful. Mr. Obama’s suggestion yesterday of limits on the size of financial firms—with the limits still to be determined—deserves a hearing but would seem more problematic.
Still, we’re encouraged by yesterday’s announcement. The Democrats appear to finally realize that too-big-to-fail is a problem to be solved, not the foundation of a modern banking system.
http://online.wsj.com/article/SB10001424052748703699204575017341468635052.html
President Barack Obama’s plan to curb proprietary trading shows banking regulations are being implemented unilaterally, not on the global scale lenders urged, according to lawyers.
Obama proposed yesterday to limit the size of banks and prohibit them from investing in hedge funds and private equity funds as a way to reduce risk-taking and prevent a repeat of the credit crisis. Other countries, including the U.K., are pushing firms to cut risk by boosting their capital reserves instead.
“There seems to be an element of governments trying to outbid each other in regulation proposals,” said Michael Wainwright, a London-based partner in financial services at law firm Eversheds LLP. “They are all trying to catch the mood of the moment with the electorate.”
Governments are stepping up regulation of banks and insurers after pumping in trillions of dollars to bail out firms from American International Group Inc. to Edinburgh-based Royal Bank of Scotland Group Plc. Deutsche Bank AG Chief Executive Officer Josef Ackermann and Barclays Plc Chairman Marcus Agius said yesterday regulation that wasn’t globally coordinated may threaten both their industry and the economic recovery.
“You must eschew the temptation to seek refuge in the alleged safety of national borders,” Ackermann said at a London conference yesterday, before Obama announced details of his plan. “The re-fragmentation of global markets is in nobody’s interests. It will leave us all poor. We need internationally harmonized rules and global and consistent implementation.”
Too Big To Fail
While lawmakers and policy makers around the world have been grappling with what to do with banks that are deemed too- big-to-fail, measures taken by governments so far have tended to favor surcharges rather than a legal split to make risky trades less economically viable. In the U.S., the Glass-Steagall Act separated retail banking from investment banking until 1999.
“This is absolutely unilateral,” said Simon Gleeson, a regulatory lawyer at Clifford Chance LLP in London. “This is Glass-Steagall Mark Two,” he added. “Banks can take just as much risk in commercial lending as they can in proprietary trading as Northern Rock and HBOS show,” he said referring to two lenders bailed out by the U.K. government.
Obama’s call “is moving a long way from the existing Basel recommendations on capital charges, which is another way of dealing with this issue,” said David Green, a former Bank of England and U.K. Financial Services Authority official who now advises regulators outside Britain. He was referring to the Switzerland-based Basel Committee on Banking Supervision, which is preparing to raise capital standards for banks.
Obama’s Loss
Obama’s plan is subject to approval by Congress, where his previous regulatory proposals have hit resistance from some lawmakers and opposition from financial firms. He announced the plan on the day Goldman Sachs Group Inc., facing criticism from politicians and labor unions for near-record compensation pools, set aside $16.2 billion to pay employees. This week, Republicans won a victory in the race for the U.S. Senate seat in Massachusetts, a state represented by the late Senator Edward M. Kennedy for almost half a century.
“The events of the last few days politically with Obama’s loss may be a factor,” said Jonathan Herbst, a former FSA attorney now at London-based Norton Rose LLP. “This is a U.S. solution, which effectively has a historical resonance in the U.S.” he said. “European policy makers have been very skeptical about this as a solution to the problem.”
‘Obama is Right’
Others welcomed Obama’s plan. “If banks engage in very high-risk activities, they can endanger the money of their depositors,” Antonio Borges, chairman of the Hedge Fund Standards Board, said in a telephone interview. “In this sense, Obama is right.”
In October, U.K. Chancellor of the Exchequer Alistair Darling ruled out Bank of England Governor Mervyn King’s suggestion to separate investment banks from operations that take deposits from consumers and manage payment systems. Banks conduct proprietary trading for their own benefit, not for that of their clients.
Adair Turner, chairman of the U.K.’s FSA, has said he is against splitting banks. Turner is leading a committee at the Financial Stability Board, which sets policy for the Group of 20 nations, on whether banks should be split. The FSB is due to report to the G20 by October.
The proposals could affect trading at U.S. firms including New York-based Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co., according to Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.
U.K. Banks
U.K. banks with the most to lose under Obama’s plan would be Barclays Plc, RBS and HSBC Holdings Plc, said Simon Maughan, an analyst at MF Global Securities in London. Barclays fell 5.9 percent to 283 pence in London trading yesterday, RBS slid 7 percent to 35.32 pence and HSBC slipped 1.2 percent to 675 pence.
The U.K. Treasury will consider proposals, an official said. The British Bankers’ Association, an industry trade group, said it was studying Obama’s plans to see how they align with what has already been discussed in the U.K. and abroad, spokesman Brian Mairs said in an e-mailed statement.
Obama’s plan follows a slew of banking regulations proposed since the credit crisis. The U.K. government last month imposed a one-time 50 percent tax on bonuses, to be paid by banks. France’s government also said it will impose a similar levy.
Osborne Pledge
George Osborne, the Conservative lawmaker that shadows Darling in the U.K. Parliament, said that if elected his party would implement a similar plan to Obama’s in the U.K. A YouGov survey for the Sunday Times this week showed the opposition Conservatives at 40 percent, 9 points ahead of the ruling Labour party, with an election due by June.
“The whole process of re-regulating the banks is just starting,” said Florian Esterer, a money manager at Swisscanto Asset Management in Zurich, which oversees about $58 billion. “This is just the early warning shots.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=aXOSAF.hJfHc&pos=5
Jan. 22 (Bloomberg) — JPMorgan Chase & Co. and Goldman Sachs Group Inc. may have to sell some private-equity businesses and stop investing in buyouts under a proposal by President Barack Obama to limit bets made by banks with their own capital.
Obama asked Congress yesterday to prohibit banks from owning or making investments in private-equity and hedge funds that “are unrelated to serving customers.” While financial institutions could still manage the assets on behalf of clients, they wouldn’t be able to invest in their own funds or those run by firms such as Blackstone Group LP and KKR & Co.
The proposed rules may alter Wall Street’s role in private equity, where banks and investors commit money to buy companies, real estate and other assets. Banks also invest with buyout firms to help deepen their lending relationships.
“In a world where there is less capital available for private equity and hedge funds, this will take out another source of funding,” said Bruce Ettelson, head of the fund- formation group at law firm Kirkland & Ellis LLP in Chicago.
JPMorgan may seek to divest its OneEquity Partners private- equity unit, according to a person familiar with the New York- based bank. OneEquity Partners manages $8 billion in direct investments, with holdings that include TV Guide.
The rules may affect Goldman Sachs’s principal investment group, which includes the New York-based company’s stake in Industrial & Commercial Bank of China Ltd. and real estate. The group reported revenue of $1.17 billion last year.
In addition, Goldman Sachs’s global special situations group makes principal investments within the firm’s fixed-income, currency and commodities business.
Representatives of the banks declined to comment.
No Rush
The government won’t seek to expedite divestitures at banks, House Financial Services Committee Chairman Barney Frank said yesterday.
“It would be a mistake to mandate divestiture of all the hedge funds and private-equity entities that might be covered within a short period of time,” Frank said in an interview. “That would create fire-sale conditions.”
Bank executives said that based on the administration’s comments, they didn’t expect that ownership of hedge funds, such as JPMorgan’s Highbridge Capital Management LLC and Morgan Stanley’s FrontPoint Partners LLC, would fall under the new regulations because these firms manage client assets.
Asset Management OK
Austan Goolsbee, a member of Obama’s Council of Economic Advisers, said in a CNBC interview yesterday that the proposal was “not intended to get rid of asset management as a function.”
JPMorgan’s investment in Highbridge, which has about $23 billion in assets under management, is less than $1 billion.
Obama is seeking to limit the size and trading activities of financial institutions as a way to reduce risk-taking and prevent another financial crisis. In addition to curtailing private-equity and hedge-fund investments, the plan bars banks from running proprietary trading operations solely for their own profit.
Brian Moynihan, chief executive officer of Charlotte, North Carolina-based Bank of America Corp. said last week that isolating proprietary trading could prove challenging for regulators.
“You can try to define it, but I think when you offset a position you are doing it for the firm, you could say that’s proprietary but that’s actually managing a risk,” Moynihan said in testimony before the Financial Crisis Inquiry Commission last week in Washington.
Targeting private-equity investments by banks doesn’t go to the root of the problems that caused the financial meltdown, said Steven Kaplan, a professor at the University of Chicago Booth School of Business.
“Private-equity investments did not cause the crisis,” Kaplan said. “It was their loans that went bad.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=arBnX2c_SlkA&pos=1
http://www.guardian.co.uk/business/2010/jan/21/obama-banking-restrictions-reform-wall-street
An era of high rolling at the Wall Street casino will shortly come to an end if Barack Obama gets his way. The US president has delivered his biggest broadside yet against the financial industry’s excesses and is proposing the strictest restrictions on banks’ activities for seven decades.
Key to his agenda is a new regulation dubbed the “Volcker rule”, the pet project of Paul Volcker, the Federal Reserve boss of the 1980s. Volcker, known as “the tall man” in reference to his 6ft 7in height, is now an economic adviser to the White House. This rule forbids any bank holding deposits guaranteed by the government from operating hedge funds, private equity funds or from trading on its own book.
Alongside this, Obama is proposing an overall limit on the size of any individual bank ? although the White House gave no details of this and it was immediately condemned as a “vague” headling-grabbing aspiration.
The Volcker rule alone will cause havoc at Wall Street’s biggest institutions. Unstitching entire parts of their businesses will be seen as far more troublesome than previous political interventions which, in the case of the US, were lacklustre attempts to reduce bonuses and a requirement that banks took temporary treasury loans ? almost all of which have since been paid back.
Such reforms amount to a sudden change of gear for the White House. On taking office a year ago, Obama promised to act tough, blasting bonuses as “the height of irresponsibility” and mooting the possibility of a $500,000 cap on pay at the top echelons of Wall Street. After moderate voices prevailed, including those of his treasury secretary, Timothy Geithner, and the Clinton-era economic guru Larry Summers, the measures were quietly watered down.
The new year, and the annual bonus season that goes with it, has put banks back on the political map and thrown them into heightened controversy, as multimillion-dollar pay packages send Washington into apoplexy.
It emerged recently that one senior executive at Citigroup, John Havens, was being paid $9m, even though the bank was still losing money.
Critics of Wall Street were quick to welcome Obama’s renewed aggression. Anna Burger, secretary treasurer of America’s SEIU union, said: “President Obama sent a strong and clear message to Wall Street: The game is over. Taxpayers will no longer be held hostage by Wall Street’s obsession with reckless policies and obscene profits.” But to be enacted, the changes will need to go through Congress which, as the recent battle over healthcare reforms has proved, is no simple matter. “In the form that it’s been proposed, I’d be very surprised if it passes,” said Gerard Cassidy, a banking analyst at RBC Capital Markets, who foresees huge practical questions.
Among the issues to be settled is whether foreign banks operating in the US will fall under the restrictions. If they do not, then American firms would be able to claim, legitimately, to be suffering a huge disadvantage.
The question of how to cut institutions down to size has been grappled with on the international stage. Since Lehman Brothers collapsed in September 2008, Obama, Gordon Brown, Nicolas Sarkozy and many other world leaders have been debating how to prevent the financial system from crashing down a second time.
In Britain, the most outspoken advocate of reform has been Mervyn King, the governor of the Bank of England. Right from the start, King was exercised by the “moral hazard” implicit in providing multibillion-pound handouts to banks without asking for anything in return.
In public, he weighed up the pros and cons of a reviving America’s 1933 Glass-Steagall act splitting investment banks from commercial banks.
King made it clear that he was in favour of moves to restrict the size of banks, saying: “If some banks are thought to be too big to fail then, in the words of a distinguished American economist, they are too big.”
Alistair Darling has always taken a cautious approach to City reform, keen to protect London’s prominence as a world financial centre. Although the government now wants to diversify the British economy, the chancellor is acutely aware of the fact that the City provides a hefty chunk of the Exchequer’s tax revenues.
While good news for investors, this week’s clutch of strong profits from JP Morgan, Bank of America, Morgan Stanley and Goldman Sachs have only inflamed public passions ? and in Washington, Democrats view the subject as a sure-fire vote-winner. Stung by Goldman Sachs’ handout of $16.2bn in staff remuneration today, Peter Welch, a Democratic congressman from Vermont, accused Wall Street of profiting from the assistance of taxpayers: “There is no question Goldman is good at what it does. The problem is that what it does is not good for the American economy.”
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