Obama on Too Big to Fail

Following on from last week’s post on Barclay’s and their comments on TBTF European banks, it’s interesting to see that President Obama today announced that he will be proposing legislation that will limit proprietary trading activities of large banks as well as impose limits on their growth in liabilities. Pretty clearly, whatever gets proposed isn’t going to please former IMF chief economist, Simon Johnson, but it’s still good to see these issues being addressed.

I’d guess it’s highly unlikely that any such bill would get passed through the US Congress—and I would have said this even before yesterday’s Senate election in Massachusetts. Indeed, I suspect Obama probably also figures it’s a long shot and that this annoucement and the proposed bank tax are primarily smart political moves from the President: “So if these folks want a fight, it’s a fight I’m ready to have” is just the kind of language to get the currently disappointed Democratic base charged up and it’s probably not a bad fight to have lost and thus have as a live issue going into the midterm elections.

From a European perspective, I suspect this may be an area where there would be more political agreement in Europe than in the US.  An optimist might hope that the calls for limits on bank size from Lord Turner and other senior figures in the UK could lead to agreement at European level. Even more optimistically, one might hope that this could be an issue on which the new European Systemic Risk Board could also make some running to show it’s not just going to be a talk shop. A pessimist might reckon that both the EU and ESRB are far too unwieldy to make progress on such a complex issue.

45 replies on “Obama on Too Big to Fail”

@ Karl

“I’d guess it’s highly unlikely that any such bill would get passed through the US Congress—and I would have said this even before yesterday’s Senate election in Massachusetts.”

I wouldn’t be so sure. The bank levy he proposed last week has apparently gone down very well on Main St, and hitting the banks where it hurts seems to be the only topic that mainstream populist Democrats and Republicans agree on. After the healthcare debacle, this could be an easyish win for Obama, even if the actual legislation/regulation is ultimately watered down and given some loopholes.

A pretty dumb move by a President that looks increasingly like a one termer. Pretty soon America will be longing for the return of GB2. what constitutes prop trading? Does it mean a ban or curb on banks owning securites such as corporate bonds for their own account? If it does, then who will buy this paper? Will it translate into higher borrowing costs for MAin Street or lead to a further credit crunch in tems of mking the corporate debt and mortgage market even more illiquid.

I agree that restricting “proprietary trading operations unrelated to serving customers for its own profit” is vague and possibly dumb. On the other hand, the general idea of providing some distance between utility and casino banking is something backed by a lot of clever people. Is the world really best served by having enormous institutions that looked like Lehman and Bear prior to collapse, with huge long and short positions in equities and massive overnight repo borrowing?

As for who will buy corporate bonds — bond funds, pension funds, these will still exist right? The units that would buy these bonds would still exist. They just wouldn’t be attached at the hip to organisations that have cast-iron liability guarantees from the US government.

Still, I think the proposals to limit bank size — however lame — are more important.

There will be more Republican support for this than you might imagine Karl, judging from reactions reported to date in US. Obama’s statement is very vague of course. But broker-dealers with no retail assets or liabilities, massively leveraged, with a Govt guarantee and access to the Fed window, have to be toast in any US reform. Even Republicans won’t defend that version of capitalism.

Note absence of Geithner from the spinfest. A Paul Volcker production?

@Karl, in estimating the amount of support that will come from congress for any such bill, account will have to be taken of this supreme court decision today in the US


which removes the limit to the amount of campaign money corporate America can give to their senators.

Obama may find himself fighting both the banks and their newly minted senators.

@Colm McCarthy, Eoin
inclined to agree with you watching it tonight in the US. It seems the Senate Minority Leader is considering supporting some version. Tim Geithner has reservations concerning banks ability to compete internationally. The market reaction seems to indicate they believe he will get reforms through. Talking to business people here today, they are in agreement with the the President.
The level of anger with Wall Street is unprecedented. It would make you wonder about those clever Wall Street chiefs and their ability to alienate the population at large. Reminds me of home.

@ Karl,

Looking that the TV presentation I’m inclined to see this as a Palace Coup.

Obama says (at 2:44) “…it’s for these reasons that I am proposing a simple and common sense reform which we’re calling the “Volcker Rule”…”

Obama is making sweeping policy statements about the future of banking in the USA and Geithner & Bernokio are not there. Surely something is afoot in Obamaland?


If Volcker has the whip hand (and it certainly looks to me that he does) there are considerable implications for US monetary and foreign policy.

Interest rates could rise significantly over the next couple of years.

Relations with China could become quite frosty.

Obama gets one chance at this. Right now he’s a one term President. He’s got Congressional elections in November of this year. After that he’s in election mode for his own job.

I don’t see Geithner (Goldman Sachs getting paid 100c on the dollar for CDS issued by AIG) being reappointed and Bernokio could be in trouble.

Could be wrong, but the body language speaks of a sea change.

“Change you can believe in”

Naw. That would be too much.

“Under the most radical interpretation of the current proposals, which have to be approved by Congress and implemented by regulators, banks would be forced to spin off large parts of their asset management and internal hedge fund operations.”

To the Cayman Islands hopefully (Obama can give them free six shooters and their own sheriff just in case anybody cheats at the Casino).

But hey, Fianna Fail & the Greens will probably offer them a minus 20% corporation tax to locate in the IFSC.

To “create” jobs don’t you know.


So, Brian Cowen stands behind a podium. On his right Brian Lenihan, on his left John Gormley.

He begins….

“My commitment is to recover every single cent the Irish people are owed,”

“My determination to achieve this goal is only heightened when I consider that the banks owe their continued existence to the Irish people,”

Then I wake up.


Geithner was there – standing next to Barney Frank (but not visible in this clip). He was on TV in the US this evening explaining Obama’s proposals.

The levy on the banks is a levy on future bank customers…….discuss! The incidence is on the bank but the burden belongs to the bank customer! Just like taxes, the burden is on the small, little, insignificant, meaningless, useless eaters, unemployed, unemployable, shiftless, unionised, grubby, “people”.

All bank liabilities must be paid off. Whatever is left belongs to the people. At their deflated values…… While the inflated debts are paid off! Wow this banking is a real racket!

Bernokio! Hah! Personal remarks about the growth of his nose are surely in bad taste? Could this be racist?

Who is extracting all this money from the international credit system? Who? Follow the money? Do economists care? Are they too busy measuring deck chairs? For God’s sake give them statistics, oh the humanity! Blind and unable to see what has happened they need our help?!


Too many rats leaving the ship? Timetable moved up? What did the FT’s Gillian Tett write on the UK becoming the next Iceland? Qhy has the FT blocked access to that article? Is time of the essence now?


Don’t try the FT article it is “over loaded”!

Can’t see it being much of a fight. Obama will be lucky if they even let him get into the ring. I don’t buy it and I suspect it’s posturing to take the light off of problems elsewhere (e.g. healthcare, more troops being sent out, change we can’t do, etc.).

@ podubhlain

“Tim Geithner has reservations concerning banks ability to compete internationally.”

I’d agree with him but for the fact that Brown and Sarko will probably row in behind him with similar suggestions for this side of the Atlantic. Could obviously be different if Cameron gets in in May, but until then it’ll probably be Merkel who tries to plot a less dramatic course of action.

Eugh, just noticed we’re basically entering into politics.ie-land here. I feel dirty.

I am surprised if there is any support for this among mainstream economist. I have been studying these two crashes (US and Ireland) for two years and I cannot see any evidence that bank size played a large role, particularly in the US crash. Within the domestic banking scene the US probably still has too many banks, so the only way to shrink them is to withdraw a bit from global banking. So is Obama proposing that London become more of the global banking centre at the expense of NYC? Global banks are bound to be big and they have to set up somewhere.

These are just some informal thoughts but it seems a bit surprising as a suggested improvement. Doug Diamond’s tax (in the New York Times op ed section recently) seems a better suggestion.

I suspect that those predictions of one term only for Obama will go the same way as most economic predictions.Dont underestimate the most politically and strategically intelligent politician of an era.

@ Martin Fetherston


So it was all a dream.

So when Obama says “If they want a fight” Geithner is right behind him saying “On ya go. I’v got your back”.


I know you might be feeling dirty, but this is going to be a dirty fight. The Grrenspan-Rubin-Levitt-Summers quadrumvirate persuaded Bill Clinton to let the genie out of the lamp with not only with the repeal of Glass-Steagall, but with the emasculation of the Commodity Futures Trade Commission (which forced the resignation of the eminently sensible Brooksley Born) and a bonfire of other long established financial sector regulation. Blair and Brown were in thrall to the quadrumvirate and cheerfully provided a refuge in London when the necessary, but clumsy, Sax-Box legislation was enforced following the implosion of Enron and other big corrupt players.

The UK and the EU will have to respond to this move by Obama. If he’s seen to be on his own, it will die. The principal economies of scale are in IT systems and customer management systems. Market liquidity doesn’t require size; in fact size (and fewer players) constrains liquidity and encourages the development of illiquid exotic OTC trades that contributed so much to the current mess. So the focus should be on size – sufficient to capture economies of scale and scope (and to pass some benefits on to consumers) and much less on what banks do.

This should encourage a refocus on competition law and policy. Unfortunately the highly capable Competition Commissioner, Neelie Kroes, in the previous Commission has been sidelined and I’m not sure her successor has the stomach for the fight – or be allowed politically to progress it. This requires collaboration and co-ordination among the trust-busting arm of the US DoJ, the UK Competition Commission & OFT and DG COMP of the Commission. Naturally, the ESRB (mentioned by Karl), the Fed, the BoE, the ECB and the BIS in Basle have a major role to play, but ths is primarily the bare-knuckle trust-busting of the Sherman Act.

@ Greg Connor

I am broadly in favour of measures that act to curb the size of the largest global banks. Not a sledgehammer approach — so I wouldn’t favour the limits on shares of liabilities mooted by Obama. However, I do favour a more “organic” approach involving higher capital ratios and higher liquidity ratios for large banks.

Reasons for this?

1. You may be right that bank size, per se, did not play a big role in the crash — lots of banks, of all sizes, got into trouble and it was certain activities rather than certain types of banks that caused the trouble. However, we have to accept that banks may fail again in the future — many would argue that the moral hazard associated with the bailouts have made this more likely. And when this starts to happen, we have to look at what the fiscal implications are. TBTF is a genuine issue not just a slogan. As of 2009, a bank as large as CIT Group (not Citigroup) with assets of $80 billion was let fail.


So that was a big bank. But not too big to fail and thus requiring taxpayer funds to be rescued. Would the US be so much worse off if it imposed regulations that encouraged banks to be not much larger than this size.

2. Yes, the US has too many banks. But that doesn’t mean encouraging the smallest banks to be folding into the very largest. Regional consolidation, involving merging together of lots of mom-and-pop operations, is a good idea. BoA taking over a local bank on evey main street is not a good idea. Bank mergers that produced a bunch of CIT Groups would still leave the US with a lot less banks.

In relation to “is Obama proposing that London become more of the global banking centre at the expense of NYC? Global banks are bound to be big and they have to set up somewhere.” I’d make two points:

1. The idea that we need to have lax banking regulation may so as not to lose banking jobs and revenues to other places is exactly why we have global banking regulation agreements. You can be sure that Obama will be expecting the UK government to also adopt such regulation — and based what Brown, King and Turner have said, this may be reasonable.

2. In relation to “global banking” one might question whether or not we really need to have global banks. Ultimately, fiscal responsibility for bailouts tends to fall back on national governments and we’ve seen during the crisis the complications associated with failing cross-border European banks. If a bank holding company owns banks in multiple countries and sees synergies, fine. But within national borders, governments have to think about questions of too big to fail\too big to save.

i think people need to realise that this may not actually have as much affect on some ‘banks’ as they think. Explicit prop trading, completely unrelated to customer business, only generates between 2-5% of total revenue at most of the major banks, and only 10% at Goldman’s. Lots of the rest of the general ‘risk positions’ are generated from customer flow or held in investment books, and so would still be allowable going forward. It was these positions, rather than the explicit prop positions, which actually generated most of the major losses at the US banks, and so Obama’s proposal wouldn’t have really prevented that for the most part. A bigger issue is the “limiting” of total liabilities, which in theory is a very good idea from the TBTF perspective, but again, this is going to be difficult to do at the same time as advocating for increased lending to businesses etc.

@Gregory Connor
The point of this legislation, as was the point of Glass-Steagall, should not be to make more or less susceptible to failure, but to ensure that if they fail through speculative investments that they don’t bring the retail banking system down with them. The state/taxpayer should be able to look a failing bank in the eye and say “that’s a damn shame you’re going out of business. Goodbye.”

I expect there will have to be further deeper changes, in particular with relation to retail banks buying derivative protection for this separation of risk to take place. I expect banks will have to downsize more. I expect we’ll see higher levies on retail banks (as they will still hold assets in addition to their deposits and their deposits will be protected and a Savings&Loan collapse (basically the same as the Irish one) is still a likelihood, as a result of a property bubble).

And yes, consumers will pay more for this. As they should. Credit is too cheap. Margins are too low. Risk is underpriced.

As i suggested…

Econ Min Lagarde said she is very pleased that Obama is “following our lead”



@ Karl Whelan

I’m not sure that CIT is necessarily a good example in this case as they were not a traditional bank. In fact, they adopted the banking flag of convenience during their death throes in a vain attempt to obtain TARP funding (and effectively a Federal Bailout). Ultimately they failed in this attempt.

Obama’s speech yesterday was definitely targeting those banks with huge retail deposit books (with an FDIC guarantee on those deposits) who then use some of their capital base to make leveraged trades on all kinds of markets (the discredited CDS market was cited by name during the speech). The message seems to be that if you take advantage of the FDIC guarantee then you have a responsibility to limit the amount of risk on your books.

Geithner spent a good 20 minutes on PBS news last night explaining how he had worked closely with Paul Volcker on a set of proposals. http://www.pbs.org/newshour/bb/business/jan-june10/banks_01-21.html However, it seems clear from the reports that Geithner and Summers did not want to push things this far when the matter was first raised but they have been (perhaps reluctantly) persuaded to back the plan.

There is no doubt that Geithner and Summers are perceived as being too close to the banking lobby (the AIG story rumbles along here) and there is a distinct possibility that the Treasury Secretary might not see out the year (especially with mid-term elections in November).

@Karl Whelan
“Andy Haldane’s “doom loop” speech is further evidence of how seriously the Bank of England takes this issue.”
The Irish banking system, AIB particularly (which was the biggest component) are already a doom loop.

Foreign experts would be astounded to know it was still behaving recklessly in March 2009, months after its collapse, and will continue to do so.

Watching Austan Goolsbee, Chief Economist of the President’s Economic Recovery Advisory Board and Robert Gibb the Press Secretary on C-Span last night it was apparent that the banking plan was well considered. The Chief Economist was particularly impressive and candid. The text of the President’s speech seems to single out a certain institution for unacceptable practices like betting against their clients. In fact, the entire speech was refreshingly candid.

Would it be a good idea for Ireland to set up our own broadly based Economic Recovery Advisory Board instead of the present set up?

@ Karl Whelan

The world has had global banks for at least 200 years, and they have always been important in supporting and developing trade throughout that period. I am not sure that the economies of scale in some trading businesses might not be substantial. I agree with you that there does need to be some scaling back of the financial services sector, and that a sledgehammer approach is a bad one.

Obama has gotten his wish already — the market value of the US financial services sector has fallen approx 8% in the three days since his proposal was mooted. Unfortunately the value of the US equity market has also fallen, by about 5%. Monday looks dicey since after three days of falls, a weekend, and some political uncertainting about heavyhanded tactics the next week can be a hard landing. Monday could be volatile. If Obama grandstanding causes a double-dip we will lose him after one term.

@Gregory Connor

“The world has had global banks for at least 200 years, and they have always been important in supporting and developing trade throughout that period”

Supporting and developing trade is one thing, but the banking casinos that the major banking players developed contribute nothing to society. I think it was Lord Turner that first asserted this view.

The Dow is down 4.1% for the week and was overdue a correction. The banking titans are today stating that proprietary trading amounts to a small portion of their businesses. If this is true then why all the fuss?

@ Gregory Connor

“Unfortunately the value of the US equity market has also fallen, by about 5%.”

As a matter if interest why is it “unfortunate” that a stock market should fall?

Manipulation and insider trading aside are Stock Markets not price discovery mechanisms?

AIB has not behaved recklessly if it has secret guarantees from those in power. This explains why they appear to be reckless. From the point of view of customers and taxpayers this might be inadvisable and appears to explain their behaviour. But AIB senior manangement are then behaving logically. It just happens that the taxpayer has unkowingly, encouraged that behaviour.

The managers we voters have appointed are exceeding their remit? Perhaps.


The only “unfortunate” thing about a falling stock market is the destruction of wealth.
You are correct that markets are really “price discovery” methods but also opinion polls on the direction of the economy. What they are saying at the moment is that this week’s policy announcement by Obama will reduce the profitability of the banks in future, curb the rate at which they accumulate capital and so erode their ability to lend even further. The logiacal outcome of this is lower growth and higher unemployment. When Main St figures this out over the weekend there will be a bit of a problem for the Democarats.

@Colm Mc Carthy
Yet Goldman’s CFO ruled out reverting to the status quo ante before Lehman’s. they intend to stay as a Bank. So it would appear its GS against a lame duck President now. My bet is that the GS model with a few tweaks remains intact.

Goldman Sachs, JP Morgan Chase, Citigroup, Morgan Stanley are all among the top 20 donors to Obama, Goldman Sachs being the 2nd biggest! Don’t think the reforms are going to be too harsh. Remember the bank levies will take approx $90 billion from the banks over 5 years (I think) but TARP has already pumped in upwards of $650 billion into the banks…….it doesn’t add up when Obama says he will get back every cent!

Sorry for bringing up the political angle again!

The FT reports today that the top 4 lenders controlled 35% of US deposits in 2009, up from just over 5% in 1998.

@ joe lawlor

“lame duck President”

Writing political obituaries three years before an election, is a little premature, if history counts for anything.

@ Michael,

I know but where would we be if we could not make outlandish predictions.

@ de roiste

biting the hand that feeds you, clever strategy?

@ joe lawlor

My point exactly, he won’t bite the hand that feeds him. $90 billion is derisory compared with the amount of money that has been pumped in ie. it’s more a PR exercise and more than likely the customer will pay this anyway through higher charges.

Again the reforms could all be political gesturing. The reforms brought in could be totally watered down and in my opinion will be.

Remember last year Obama grabbed the headlines when he announced a cap on bankers’ pay. But when you look at the small print this was for banks who in the future availed of government bailouts……most of the big boys had already got their bailouts at this stage so were exempt! Obama got his plaudits and the bankers carried on as normal.

@ De Roiste

‘but TARP has already pumped in upwards of $650 billion into the banks……’

No it didn’t, it pumped in circa $330 billion. Most of this (~$200 billion) went on the CPP which a lot of banks have paid back. The rest was was split between Citi, BOA (which I believe they have repaid) AIG and the automakers. $90 sounds about right.

@ joe lawlor

“The only “unfortunate” thing about a falling stock market is the destruction of wealth.”

Wealth is not destroyed by falling stock markets.

The human, physical and intellectual “wealth” is exactly the same. What has changed is the market’s perception. The market “prices” the wealth differently.

“curb the rate at which they accumulate capital and so erode their ability to lend even further.”

Is it not obvious that it was unregulated excess credit creation by the banks that created the asset bubbles and with them employment bubbles. The jobs were temporary based on excess credit.

The massive misallocation of capital was only possible because of excess credit creation.

Now the debt has to be paid back. Creating more credit will simply create another bubble.

Maybe the debt should be written off. Anglo Irish & Irish Nationwide particularly.

@ GK

Is it convenient to ignore the $500,000,000 that Fannie Mae & Freddie Mac will write off in favour of “Wall Street”?

When the worthless mortgage backed securities that they hold are found to be what they are do you think the “banks” will divi up?

@ GK

That should be $500,000,000,000.

Are Fannie & Freddie not just an extension of the Feral Reserve?

@ Greg

‘When the worthless mortgage backed securities that they hold are found to be what they are do you think the “banks” will divi up?’

Why should they? The GSE’s were willing buyers in an effort to provide potential home owners with easy credit, they (and the government that sponsored them) are therefore responsible for any losses on these securities.

‘Are Fannie & Freddie not just an extension of the Feral Reserve?’

Not to my knowledge.

sorry the $90 billion will be recouped over 10 years not 5


I have seen in a lot of articles that TARP amounts to $700 billion

I suppose one of the arguments is the banks are back to making substantial profits in the US while the general public have seen the value of their assets reduced by a couple of trillion, does $90 billion seem like a fair return? More a moral question than anything else.

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