An Obama Reboot? President Proposes Volcker's Glass-Steagall Redux
Wed Jan 20, 2010 10:03pm EST
Sure to dominate the media cycle today is the Obama Administration’s surprise announcement of what some observers are already calling Glass-Steagall II, after the late, oft-lamented law that separated investment and commercial banking activity, whose repeal under President Clinton has been blamed in part for the financial crisis. The New York Times reports, and the Wall Street Journal details, that Paul Volcker, an Obama advisor who was reported as being marginalized in the White House just a week ago, is behind this sudden and unexpected announcement. “The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading. . . Only a handful of large banks would be the targets of the proposal, among them Citigroup, Bank of America, JPMorgan Chase and Wells Fargo. Goldman Sachs, the Wall Street trading house, became a commercial bank during this latest crisis, and it would presumably have to give up that status,” the paper said. “On the one hand, they are commercial banks, taking deposits, making standard loans and managing the nation’s payment system. On the other hand, they trade securities for their own accounts, a hugely profitable endeavor. This proprietary trading, mainly in risky mortgage-backed securities, precipitated the credit crisis in 2008 and the federal bailout.” That’s not to mention, of course, that investment banks, with Goldman being the prime example, used prop trading to bet against some of the very securities products they were selling to customers. Despite the focus on Volcker’s proposal, the paper makes the curious note that Timothy Geithner will appear with the president during the announcement.
Banks have been fighting tooth and nail against nearly every regulatory proposal to come out of Washington these days, but they certainly aren’t making things easier on themselves when things like Morgan Stanley’s bonus structure comes to light. The Times reports that, “Despite the first annual loss in its 74-year history, Morgan Stanley earmarked 62 cents of every dollar of revenue for compensation, an astonishing figure, even by the gilded standards of Wall Street. In all, the bank set aside $14.4 billion for salaries and bonuses.” There are some details about how accounting charges having to do with appreciation on previously underperforming investments have skewed the results to look, well, bad, but if, the bank said, those adjustments were taken out, its compensation levels would’ve looked like every other banks, about 50% of revenue. Fine, the paper notes, “But critics said those justifications ignored the fact that Wall Street’s resurgent revenue and bonuses were possible only after billions of taxpayer dollars had been pumped into Morgan Stanley and other banks, directly through the federal bank bailout program, as well as indirectly through a panoply of other generous government programs.” So, a Yale professor, asks, “Where is the column adjusting their performance for that, too?”