That’s what the municipal bond market is telling investors. It’s also telling them not to fret about state and local economies, beset as they are by budget deficits, pension shortfalls and rising health-care costs.

Of course, this market doesn’t speak in English, but in numbers. Sometimes, such as when tax-exempt bonds yield double their U.S. Treasury counterparts, the numbers shout. More often, and in the present case, they imply and infer.

What is the municipal market saying when the Los Angeles Unified School District borrows money for 10 years at 3.54 percent, or Seminole County, Florida, does the same for 3.49 percent, or the town of Rye, New York (a natural Aaa credit from Moody’s Investors Service) pays 2.93 percent?

California, Florida and New York are all looking at oceans of red ink right now, and for the foreseeable future. The market says: Don’t worry about it.

These aren’t isolated examples. Every week, hundreds of municipalities sell bonds. It’s business as usual. The Bond Buyer’s 20-General Obligation Bond Index, the oldest gauge of what it costs these places to borrow money for 20 years, is 4.34 percent, well below its average for the last 10 years of 4.79 percent, and within calling distance of its recent record low of 3.94 percent. That rate, not seen since the days of U.S. President Lyndon Johnson’s administration, was reached in 2009.

There has rarely been a better time for a municipality to borrow money. That’s a good thing because they will need it.

It’s Munigeddon

The news is bad. The headlines are worse, especially on the blogs, where a mixture of misinformation and hysteria typically holds sway. California is Greece! All the states are going bust! It’s Munigeddon!

Let me repeat: The news is bad. I can’t remember when it was ever worse, in terms of tax revenue and investment returns falling, and defaults rising.

Add to that the refusal of public officials to fire government employees and instead contemplate Chapter 9 municipal bankruptcy; labor unions digging in their heels; the Department of Justice’s investigation into anticompetitive practices among dealers; and now a Capitol Hill proposal to do away with tax- exempt borrowing altogether.
It’s not surprising that some people are starting to think the municipal market resembles the trailer for last year’s movie called “2012.” You may remember it: Actor John Cusack is racing his car ahead of a convulsive suburban landscape.

Scarce Commodity

The municipal market isn’t a disaster movie. There are no terrific explosions. States and localities rarely go out of business. They muddle through.

The municipal market isn’t the stock market. With equities, bad news has a real minute-by-minute impact. Yet here we are in the depths of Munigeddon, and it’s business as usual. One of the reasons for that is because municipal bonds are relatively inert within a few weeks after they are first sold. As the old municipal-market axiom has it: All bonds go to bond heaven. They are tucked away in safe deposit boxes until they mature or their owners are called.

The biggest reason tax-exempt yields are declining even in the face of bad news by the barrel is because there are fewer tax-exempt bonds. Tax-exempt, fixed-rate issuance fell 6 percent to $39.2 billion during the first two months of this year from the comparable 2009 period, based on Bloomberg figures. Taxable offerings, driven by the Build America Bonds program, were almost 16 times as plentiful, at $19.1 billion, the data show. Public offerings of the BAB subsidy deals began in April 2009.

It’s a simple matter of supply and demand. The issuers are selling more taxable bonds because the government’s 35 percent subsidy makes it cheaper for them to borrow that way than in the tax-exempt market. And the government aims to extend the BAB program, and expand other ones that would replace exemptions with tax credits. Even if Senators Ron Wyden and Judd Gregg go nowhere with their overhaul of the tax system, the tax-exempt market is dying a slow death. One way or another, the federal government will kill it off.

The scarcity premium trumps the hysteria discount.

http://www.businessweek.com/news/2010-03-09/-bond-heaven-defies-the-disasters-in-munigeddon-joe-mysak.html

Sants will step down by the end of the summer, the FSA said in a statement. He began his role in July 2007, weeks before problems emerged with subprime mortgages that triggered the credit crunch, and two months before a run on deposits at Northern Rock Plc, Britain’s first casualty of the crisis.

“When I was appointed I told the board that I planned to serve as CEO for three years, and I intend to stick to that timetable” said Sants, 54, in the statement. “Those three years have encompassed the most extraordinary circumstances for a financial regulator, and I am very proud of the manner in which the FSA rose to the challenge of dealing with such unprecedented turbulence across global financial markets.”

The opposition Conservative lawmakers in the U.K. have pledged to abolish the FSA and carve up its duties should they win this year’s election, which must take place by June. They said they will return banking supervision to the Bank of England, arguing that the FSA’s lax oversight of banks contributed to the crisis.

The FSA was created by Prime Minister Gordon Brown in 1997 in what was one of his first undertakings as the then-Chancellor of the Exchequer. The Labour government had swept to power the same year, promising to overhaul financial services so scandals like the collapse of Barings Plc and the closure of the Bank of Credit and Commerce International wouldn’t happen again.

‘Orderly Succession’

Brown’s spokesman Simon Lewis told reporters in London that there would be an “orderly succession” to appoint a replacement for Sants.

“Taken with the Conservative Party threat to break up the FSA, Hector Sants’s resignation risks the regulator being viewed as a lame duck,” said Jonathan Davies, a regulatory lawyer at London-based Reynolds Porter Chamberlain LLP. “This is not the environment in which the future of financial services regulation can be left hanging in the balance for months, it risks sowing too much confusion.”

Sants, a former executive at Credit Suisse Group AG, didn’t say where he would go after a period of six months’ leave that he must complete after departing. His resignation comes at a key time for regulation both in the U.K. and across the world, where policy makers are trying to grapple with rules in the wake of the worst financial crisis in a generation.

‘Dark Ages’

Sants has been critical of the Conservative plans in recent months, describing them in November as a “return to the dark ages.” He also said they made recruiting more FSA officials a challenge.

“Sants carried the can for failures at the FSA, but he did plenty of good stuff too,” said James Perry, a lawyer at Ashurst LLP in London. “As a poacher-turned-gamekeeper, he knew some parts of the market, particularly equity, very well indeed.”

A cross-party parliamentary committee criticized the FSA for “systematically failing” in its duty to supervise Northern Rock in January 2008. Since then, Sants made the FSA undertake an internal audit into what went wrong, and personally apologized for FSA failings.

He initiated a system of tougher, more intrusive regulation where the FSA scrutinizes all aspects of banks’ business models, from whom they hire to how much they pay them, saying last year that people “should be frightened” of the FSA.

‘Mixed Bag’

“In terms of his legacy it’s a mixed bag: he sharpened up and refocused the organization but as a result of the financial crisis, firms are struggling with a lot of heavier regulation that he is a proponent of,” said Ian Mason, a regulatory lawyer at London-based Barlow Lyde & Gilbert LLP, who left the FSA as an enforcement official in 2005. “He’s a very decent guy and popular with staff. He’s perceived as a good manager.”

His replacement will be chosen jointly by the U.K. Treasury and the FSA’s board. The Treasury declined to immediately comment on whether it will begin a selection process before the election, and the FSA said a replacement would be selected in due course.

“They may begin the wheels of it but candidates of standing will wait to see the outcome of the election and what the new role will entail,” Mason said of the selection process.

While Sants has no official deputy, the most senior FSA employees under him are Sally Dewar, managing director of risk; Jon Pain, managing director of supervision; and Mark Norris, the chief operations officer, according to the FSA’s Web Site.

‘Strong Purpose’

“He will leave behind an organization with strong purpose and clear strategy,” FSA Chairman Adair Turner said in the statement. “We will continue to work together to deliver the FSA’s reformed and intensive supervisory approach and drive forward the global regulatory reform agenda.”

Turner has been more visible than Sants in recent months on the world stage. Turner is heading a group at the Financial Stability Board, a collection of policy makers and regulators from the Group of 20 Nations, examining what to do about banks that are deemed too big to fail.

In addition to the Conservative plans to split up the FSA, the regulator also faces a new framework created by the European Union, which would bolster regional agencies’ powers to oversee banks, securities firms and insurers.

Sants had a career in the securities industry before joining the FSA in May 2004 as its managing director of wholesale and institutional markets. He was a regional CEO at Credit Suisse First Boston and worked previously with Donaldson Lufkin & Jenrette before it merged with CSFB in 2000.

He said in 2004 that he was joining the regulator as a committed Christian “to give something back to the system which had provided me with an interesting and worthwhile career.”

http://www.bloomberg.com/apps/news?pid=20601108&sid=a93hkb6y6smY

Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.

Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.

Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed last night.

The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.

The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt.

Fears countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.

Australia’s ASX 200 slumped 2.4 per cent, to a its lowest close since November 5, echoing a sharp fall on Wall Street.

Asian share markets were also pummelled, with Japan’s Nikkei 225 down almost 3 per cent and Hong Kong’s Hang Seng slumping 3.3 per cent.

The damage was also being felt by European markets last night with London’s FTSE 100 down sagging 1 per cent in early trade.

Sovereign debt fears rippled through to the Australian dollar which was hammered to a four-month low of US86.43 and was trading at US86.77 cents last night.

“This does feel like ‘08 and ‘07 all over again whereby we had these sort of little fires pop up and they are supposedly contained but in reality they are not quite contained,” said H3 Global Advisors chief executive Andrew Kaleel.

“Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.”

It wasn’t all bad news with the RBA yesterday upping its Australian growth forecasts and flagging more interest rate rises this year.

The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.

The outlook for global growth is likely to be a key theme of the high level central bank talks.

The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system which will include new capital rules applying to banks and more stringent standards regulating executive pay.

A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz.

Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.

Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night.

http://www.perthnow.com.au/business/secret-summit-of-top-bankers/story-e6frg2rl-1225827368391

We don’t hear a lot that is serious about the sorry state of the nation’s infrastructure or the trade policies that crippled so many American industries or our inability (or unwillingness) to compete effectively with China when it comes to the new world of energy for the 21st century or our abject failure to provide a quality public education for the next generation of American workers, scientists, artists and entrepreneurs.

Speaking at a conference here on Wednesday, Gov. Ed Rendell of Pennsylvania said that if we don’t act quickly in developing long-term solutions to these and other problems, the United States will be a second-rate economic power by the end of this decade. A failure to act boldly, he said, will result in the U.S. becoming “a cooked goose.”

Neither the politicians nor much of the mainstream media are spelling out the severity of these enormous structural problems or the sense of urgency needed to address them. Living standards are sinking in the United States, and there is no coherent vision or plan for reversing that ominous trend over the long term.

The conference was titled, “The Next American Economy: Transforming Energy and Infrastructure Investment.” It was put together by the Brookings Institution and Lazard, the investment banking advisory firm.

When Governor Rendell addressed the conference on Wednesday, he used words like “stunning” and “unbelievable” to describe what has happened to the nation’s infrastructure. His words echoed the warnings we’ve been hearing for years from the American Society of Civil Engineers, which tells us: “The broken water mains, gridlocked streets, crumbling dams and levees, and delayed flights that come from failing infrastructure have a negative impact on the checkbook and on the quality of life of each and every American.”

The conference was sparked by a sense of dismay over what has happened to the U.S. economy over the past several years and a feeling that constructive ideas about solutions were being smothered by an obsessive focus on the short-term in this society, and by the chronic dysfunction and hyperpartisanship in much of the government.

I was struck by the absence of grousing and finger-pointing at the conference and the emphasis on trying to develop new ways to establish an economy that is not based on financial flimflammery, that enhances America’s competitive position in the world, and that relieves us of the terrible burden of reliance on foreign energy sources.

I was also struck by the pervasive sense that if we don’t get our act together then the glory days of the go-go American economic empire will fade like the triumphs of an aging Hollywood star. One of the participants raised the very real possibility of Americans having to get used to living in an economy “that won’t be number one,” an economy that perhaps is more like Germany’s.

Rescuing the U.S. economy will require a commitment, and undoubtedly sacrifices, that need to start now. And it will require leadership that pulls together the best talents from all sectors of the society — not just business, not just government, but from everywhere.

Bruce Katz, the director of Brookings’ Metropolitan Policy Program, discussed some of the steps that need to be taken to remake an economy that has been thrown completely out of whack by frantic, debt-driven consumption, speculative bubbles, exotic financial instruments, and so on.

A new, saner, more sustainable economy will have to be more export-oriented, powered by cleaner fuels, bolstered by innovation that comes from a renewed focus on research and development, and committed to delivering a better-educated, more highly skilled work force.

Mr. Katz believes this is doable, but by no means easy. The nation’s infrastructure, he said, will have to “shift from 20th-century models of transport and energy transmission to rapid bus, ubiquitous broadband, congestion pricing, smart grid, high-speed rail and intelligent transport.”

New ways of financing such transformative changes will have to be developed, linking public and private capital, preferably through the creation of a national infrastructure bank, among other things. The nation’s political leaders and the public at large will have to grasp the difference between wasteful spending and crucial investments in the future.

It’s time for serious people to step forward and help lead on these critically important issues. Time is short.

http://www.nytimes.com/2010/02/06/opinion/06herbert.html?emc=eta1

The firm will now be able to assist issuers with capital structure services across the board, such as secondary stock offerings, corporate bonds and initial public offerings.

Due to the improving economy and the pent-up demand of issuers, the industry is forecasting a substantial pickup in capital markets activity this year.

Alexandra Lebenthal, President and Chief Executive, of the certified woman-owned firm, meaning she owns over 51% of the firm and has management control, said the firm has been thinking about expanding in the area for the past year, as it is a natural extension of its existing capital markets arm.

The boutique hired Steven Willis and Matthew Eng from Muriel Siebert to head up the efforts. Willis worked for four years as senior managing director of capital markets at Siebert. A search is under way to replace Willis and Eng, said a spokesperson for Siebert.

The expansion will offer existing clients more services, attract new clients and allow the sales force to offer more products to sell, said Willis.

Additional hires will be made to build out the area as well, Lebenthal said.

The New York-based boutique, which focuses on tax-free municipal bonds and wealth management, also added two professionals to its capital markets business in August. Lebenthal, which has 36 employees, is well known in the New York area for its advertisements advocating municipal bonds.

-By Jessica Papini, Dow Jones Newswires; 212-416-2172; jessica.papini@dowjones.com

http://online.wsj.com/article/BT-CO-20100203-717611.html?mod=WSJ_latestheadlines

But these principles are in retreat, and I say this not just because of the proposed deficit commission.

The notorious Troubled Assets Relief Program (TARP) began with a virtual blank check from Congress. Treasury officials then secretly decided which companies were to receive hundreds of billions of dollars. Why these particular entities were chosen and not others remains a mystery. For months, the Treasury didn’t even disclose the identities of the major banks that giant insurer AIG repaid with its bailout money — 100 cents on each dollar AIG owed them.

The Federal Reserve, meanwhile, has gone far beyond its traditional role of setting short-term interest rates. It has bought up massive amounts of debt — mortgage debt, Treasury bills, and debt instruments emanating several public agencies, many of them supporting a wide range of private entities. No one outside the Fed knows the ultimate beneficiaries of all this government backing, the criteria used by the Fed for making these commitments, or even how much debt the Fed is buying.

Even if the economic emergency justified such secrecy — and it’s hard to see exactly why it would — the emergency is over, and yet closed-door decision making continues. Will Treasury use what’s left of TARP to help stimulate more jobs and, if so, how? Will the Fed stop buying mortgage-backed securities? No one knows.

The same pattern is evident on other issues. Congress can’t decide whether or how to limit the pay of financial executives. So where does the issue end up? The Securities and Exchange Commission and the Fed both say they’re going to look at whether pay levels are appropriate. The House and Senate can’t agree on what to do about climate change. Who decides? The Environmental Protection Agency concludes it has authority to regulate carbon emissions under the Clean Air Act.

http://www.huffingtonpost.com/robert-reich/our-incredible-shrinking_b_446748.html

Illinois is fundamentally bankrupt. It has less than $1 million in cash, pays vendors net 90, and owes its state university $450 million that it cannot pay. Oh, and it also has $60 billion in unfunded pension liabilities.

Now that the Republicans have 41 votes in the Senate, Illinois can’t count on any federal aid. The President’s home state will thus become insolvent.

(For some background on Illinois’s budget woes, see this link.)

My reader expresses similar concerns about California (where Governor Schwarzenegger’s budget assumes $6.9 billion in federal aid) and New York.
All of which raises a question for policymakers and municipal bond investors. Does the election of Scott Brown mean that the Senate will be unwilling to give federal aid to the states? The $862 billion stimulus bill last year (formerly known as the $787 billion stimulus bill) included substantial state aid, and it squeaked through the Senate with exactly 60 votes.

Now the Democrats (and the Independents who caucus with them) account for only 59 votes.

Does that bode ill for struggling states and the investors who own their debt?

Only time will tell. But I wouldn’t count the states out just yet.

The stimulus bill could have had 62 votes, but Senator Kennedy didn’t vote and Senator Franken hadn’t yet been seated. If the Senate majority can coordinate the same coalition–including Republican Senators Snowe and Collins of Maine–they will have one vote to spare for any new jobs bill (formerly known as a stimulus bill). In addition, with his paean to tax cuts in the State of the Union, the President was signaling that he wants to find enough common ground with congressional Republicans to get a jobs bill passed.

In the short run, then, I wouldn’t be surprised if substantial state aid finds its way into the jobs bill. That may buy Illinois and other struggling states some time.

In the long run, however, the reader is probably right that fiscally-strapped states will find the Senate less welcoming.

Legalistic answer to the title question: No. States can’t seek protection in bankruptcy court, so Illinois can’t technically go bankrupt.

http://wallstreetpit.com/15836-will-illinois-go-bankrupt-because-of-scott-brown

Chief executive officers including Bank of America Corp.’s Moynihan, UBS AG’sGruebel and Deutsche Bank AG’s Ackerrmann convened yesterday, a week after U.S. President Barack Obama shocked financiers with plans that may force large banks to limit their size and curb investments in hedge funds and private equity.

The private meeting, held down a hallway near the back entrance of the Davos conference center, aimed to prepare executives for another private gathering in Davos on Jan. 30 with top policymakers and regulators, including U.S. House Financial Services Committee Chairman Barney Frank.

“We’re trying to figure out ways that we can be more engaged,” Moynihan said in an interview after he left the meeting with about 30 financial CEOs. “Because, honestly, we were not considered to be the right kind of people to talk to for the ideas on how to fix this thing.”

Moynihan said that much of the discussion was about tactics, such as who the executives should approach and when. He said the bankers were concerned that too much regulation could hamper economic growth and that conflicting national approaches need to be avoided.

‘In Consensus’

“It was a positive meeting, we’re in consensus,” Gruebel said during a break in the three-hour session, declining to provide further details. “Global banks would like to have a level playing field, but regulators have a national view and politicians too.”

The attendees included Credit Suisse Group AG CEO Brady Dougan, Barclays Plc President Robert Diamond and HSBC Holdings Plc Chairman Stephen Green. Leaders of many industries hold private meetings at the World Economic Forum every year.

Nobel laureate Joseph Stiglitz, the Columbia University economist who was also in Davos, said bankers welcome the focus on a global accord on regulation.

“The bankers are loving this because they know we will never get an agreement and we’ll never get regulation and we’ll go back to where we were,” he said.

Kravis, Bernstein, Loeb

In a separate private gathering next door, Congressman Frank spoke to about 50 investors, including KKR & Co. co- founder Henry Kravis, Carlyle Group Managing Director David M. Rubenstein and Third Point LLC CEO Daniel Loeb.

“The purpose of the meeting was to have a good sense of how do you develop good regulation at a time when there’s so much friction in the market,” said Jack Ehnes, CEO of the California State Teachers’ Retirement System, the second-biggest U.S. public pension fund, who attended the meeting.

Frank, wearing snow boots and an untucked shirt under his pinstriped suit, said after the session that he was going to “crack down” on hedge funds. He didn’t elaborate.

French Finance Minister Christine Lagarde said in Davos that there should be a “dialogue” between governments and banks on the technicalities and principals of regulation. “That’s the only way we’re going to get out of it,” she said.

Two participants at the bank CEO meeting said that Obama’s proposals didn’t dominate the discussion.

‘Pay, Pay, Pay’

“It’s a little hard to figure out exactly what the words mean, and that will be shaped over time,” Bank of America’s Moynihan said. He said Bank of America and some other banks have a “minimum” amount of profit and revenue derived from so- called proprietary trading and investments.

Executives interviewed after the meetings said they understand that new rules are inevitable and urged national regulators to coordinate through the Group of 20 or other international bodies.

Some executives said they think the biggest challenge for the industry is overcoming public anger about bonuses and compensation.

“When you talk to politicians, the big issue is pay, pay, pay,” UBS’s Gruebel said.

Even though the industry has taken steps to reform its pay practices, the public isn’t satisfied, he said.

“You can’t say to anyone who’s lost his job that we used to pay someone 10 million and now we’re paying 1 million,” Gruebel said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXaiaICHCOu0&pos=7

In an interview with The Sunday Times, the chancellor made clear that he saw serious shortcomings in the American approach.

“It is always difficult to say ex ante that you would never intervene to save a particular sort of bank,” he said. “In Lehman, for example, there wasn’t a single retail deposit, but the then American administration allowed it to go down and that brought the rest of the system down on the back of it.

“You could end up dividing institutions and making them separate legal entities but that isn’t the point. The point is the connectivity between them in relation to their financial transactions.

“Equally, the large-small thing doesn’t run. Northern Rock was very small in global terms but systemically it was quite important when it got into trouble.”

The chancellor said Britain would continue to work with America on financial reform but that any proposals would have to be “workable and deliverable” and that he would not do anything to “disadvantage London relative to the rest of the world”.

Darling’s big worry is that Obama’s bombshell proposals, based on ideas set out last year by Paul Volcker, former chairman of the Federal Reserve Board, will shatter the consensus within the G20 nations on banking reform.

“If everyone does their own thing it will achieve absolutely nothing. The banks are global — they are quite capable of organising themselves in such a way that if the regime is difficult in one country they will go to another one, and that doesn’t do anyone any good.”

Lord Myners, the City minister, will host a meeting at 11 Downing Street tomorrow to discuss long-term solutions to the “too-big-to-fail” dilemma.

He is gathering senior representatives from each of the G7 nations, along with officials from the International Monetary Fund, the Bank of England and the Financial Services Authority.

Myners convened the meeting to discuss the best way to ensure banks will not need taxpayer bailouts in any future crisis. One plan is to force them to pay into a global insurance fund that could support the sector in times of stress. Another is a tax on all financial transactions, known as a Tobin tax.

Some of Wall Street’s biggest banks are examining ways to duck out of the restrictions. Goldman Sachs and Morgan Stanley are believed to be in talks with the US Treasury about changing their legal status to avoid the new rules.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6999771.ece

WASHINGTON/NEW YORK (Reuters) - President Barack Obama’s newest Wall Street crackdown was met with hesitation from Treasury Secretary Timothy Geithner, who voiced concern that politics could sacrifice good economic policy, according to financial industry sources.

Geithner is concerned that the proposed limits on big banks’ trading and size could impact U.S. firms’ global competitiveness, the sources said, speaking anonymously because Geithner has not spoken publicly about his reservations.

He also has concerns that the limits do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown, the sources said.

A White House official said both Geithner and Lawrence Summers, the director of Obama’s National Economic Council, worked closely with Paul Volcker, who heads a White House economic recovery board, in developing the proposals.

“The plan was submitted to the president with a unanimous recommendation from the economic team,” the official said.

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.

Obama 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.

A separate administration official noted that Geithner had backed a proposal last fall that did make it into a regulatory reform bill that passed the U.S. House of Representatives that would have given regulator power to curb a firm’s size.

The new proposals are late additions to a reform effort the administration kicked off last year when it sent thousands of pages in suggested financial rule changes to Congress last year.

They come as the administration has sharpened its rhetoric against Wall Street where the announcement was met with disdain. Bank shares slid and the dollar fell against other currencies.

The proposals were largely driven by Volcker, a former Federal Reserve chairman who has repeatedly advocated putting 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.

He also ratcheted up the anti-Wall Street message when he campaigned over the weekend for Democrat Martha Coakley in her race for the Massachusetts Senate seat. Coakley lost that critical seat to Republican Scott Brown, who Obama painted as a friend of Wall Street.

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.

http://www.reuters.com/article/idUSTRE60K6NV20100121?type=politicsNews%3FfeedType%3DRSS&feedName=politicsNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+Reuters/PoliticsNews+(News+/+US+/+Politics+News)