Obama announces crackdown on big banks, says he’s ready for a fight

President Barack Obama on Thursday moved to crack down on big banks and warned that he’s ready for a fight.

The new effort would restrict the types of trading, risk-taking and overall business that the world’s largest banks can pursue.

“We should no longer allow banks to stray too far from their central mission of serving their customers,” Obama said at the White House.

The new policy is subject to congressional approval and will face strong Republican and financial industry opposition.

“What we’ve seen so far in recent weeks is an army of industry lobbyists descending on Capitol Hill to try to block commonsense rules,” Obama said. “If these folks want a fight, it’s a fight I’m ready to have.”

Eight of the largest banks spent roughly $26 million on federal lobbying in 2009, The Hill reported on Thursday.

The White House is pushing a much tougher line on the nation’s financial institutions than administration officials did early last year.

The new tone – between a new fee on roughly 50 large firms announced last week and this latest push – comes as Democrats stare into a brutal 2010 election.

Obama slammed the financial industry as he campaigned unsuccessfully for Democrat Martha Coakley’s bid for the Massachusetts Senate seat. The push also comes as healthcare reform faces uncertain prospects in the Senate with Democrats now holding 59 votes instead of the necessary 60 to break a filibuster.

Big banks have repaid billions of dollars in government bailout money and have seen their stock value and profits soar in the last year. But the broader economy remains in the doldrums of 10 percent unemployment that has fueled populist outrage at Washington lawmakers.

Some Democrats, including Rep. Peter DeFazio (Ore.) and Sen. Byron Dorgan (N.D.), have urged the administration to take a much tougher tone on Wall Street.

The new restrictions on big banks would include a policy of prohibiting firms from conducting trading activities that primarily benefit their own bottom lines instead of their clients.

The administration wants to limit firms from benefiting from taxpayer support through deposit insurance and other access to government aid while they engage in proprietary trading.

The policy is also designed to limit the size and concentration of the largest firms and would extend beyond the 10 percent cap on a firm’s overall deposits.

Big banks have already been lobbying heavily against proposals from Democrats and some Republicans to impose an updated form of the 1933 Glass-Steagall Act, which drew a bright line between commercial and investment banks.

That division was dropped in the Gramm-Leach-Blilely Act in 1999.

“We’re not returning to Glass-Steagall,” an administration official said of the new policy. “This is about making sure that firms that own banks aren’t doing trading for their own account not for the benefit of their clients.”

The proposal would limit commercial banks from owning, investing in or advising hedge funds and private equity firms, a senior administration official told reporters.

Obama called the new policy the “Volcker Rule,” for Paul Volcker, the administration official and former head of the Federal Reserve.

“This prohibition says you can choose to engage in propriety trading or you can choose to own a bank but you can’t do both,” a senior administration official said.

The administration views the new policy as a requirement, instead of leaving it up to the discretion of regulators to impose new restrictions.

Some Republicans immediately criticized the new push.

“This renewed focus on financial services reform by the Obama administration is clearly a transparent attempt at faux-populism, in light of the outcome of the Massachusetts Senate race,” said Rep. Scott Garrett (R-N.J.).

The new policy also met firm criticism from financial industry associations.

“Proposals to preemptively break up large, well-managed, and well-capitalized banking companies, or to re-impose Glass-Steagall restrictions, are based on a misdiagnosis of the causes of the financial crisis,” said Rob Nichols, president of the Financial Services Forum, an organization of 18 CEOs of large firms.

“Trading, proprietary or otherwise, did not lead to the financial crisis."

Steve Bartlett, president of the Financial Services Rondtable, said the new plan would hurt the broader economy.

“The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs,” Bartlett said.

This story was updated at 2 p.m.

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