Obama unleashes new regulations on Wall Street

Wall Street suffered its worst one-day decline in nearly three months on January 21 after the Barack Obama administration announced a slew of proposals aimed at tightening the regulatory noose around the nation's biggest financial firms. The proposals aim to deter commercial banks from becoming so large that they put the broader US economy at risk and distort normal competitive forces. The proposed new norms include limiting the size and scope of Wall Street's trading operations.
Obama, who blames excessive risk taking by Wall Street firms for helping to cause the financial crisis, also intends to stop them from owning or investing in hedge funds. They also prohibit commercial banks from owning, investing or advising private equity funds. "If these folks want a fight, it's a fight I'm ready to have," Obama told reporters at the White House, flanked by his top economic advisers and lawmakers. "We should no longer allow banks to stray too far from their central mission of serving their customers," he said.
The proposed rules also would bar US financial institutions from proprietary trading operations for their own profit. The White House blames the practice for helping to nearly bring down the US financial system in 2008. They would also set a new limit on banks' size in relation to the overall financial sector that would take into account deposits as well as liabilities and other non-deposit funding sources. Only commercial banks that don't do proprietary trading on their own accounts would have access to the Federal Reserve's discount window, a government-lending facility through which banks borrow reserves at a discount.
This would separate commercial and investment banks. Key banks that would be covered by the proposed restriction include Citigroup, Bank of America, JP Morgan Chase, Wells Fargo. Traditional investment banks such as Goldman Sachs and Morgan Stanley could need to give up their status as commercial banks to continue proprietary trading of mortgage securities. Goldman Sachs would need to divest its private-equity and hedge fund businesses as well as limit its proprietary trading, based on the proposal.
The plan is in tune with the proposal of former Federal Reserve chairman and current economic advisor Paul Volcker, who has called for greater restrictions on financial institutions in the wake of the financial crisis. Before his announcement, Obama met Volcker. The White House did not discuss the proposal with the banking industry prior to making it public.