President Obama’s big announcement of a plan to take on banks didn’t necessarily get the reaction he was hoping for. The plan, which will propose curbing risk at the nation’s largest financial institutions by forcing them to minimize trading with their clients’ money and give up their stakes in hedge funds and private-equity firms was met with skepticism from not only his enemies but his allies, like Mayor Bloomberg and, reportedly, his own Treasury secretary. For some, the plan seemed confused and unfocused, as such trading only accounts for a small amount of banks’ revenues and was not actually the source of the financial crisis—derivatives and securitized financial products were. “This is like the financial equivalent of responding to 9/11 by invading Iraq,” twittered one Reuters journalist. “What is happening about what caused the crisis in the first place and why is there no mention of it anywhere anymore in none on of the proposals?” said Yaël Bizouati at Dealbreaker. And after a year of dissecting legislation that has failed to pass, even those who supported the idea were jaded about this plan’s chances of making it.
Here’s a sampling of what some economic commentators think will — and won’t — happen with what is being somewhat ironically called “Glass-Seagall 2.0”:
• “This is great. It means that the administration is moving in the right direction — breaking up big banks,’” says economist James Kwak. However, he doubts it will fly with Republicans, and the administration’s sudden embrace of Paul Volcker’s plan after they publicly disagreed with it just this past October gives him pause. “While I welcome the shift, that makes me wonder how much of it is politically motivated,” he muses. [Baseline Scenario]
• Of course it’s politically motivated, Gary Dewaal, general counsel for Paris-based Newedge Group, “the world’s largest futures broker,” tells Bloomberg: “The Democrats are trying to come up with a theme that appeals to the public — ahead of November congressional elections. It’s almost as if there’s a specific effort: Let’s come up with a new proposal every week to keep the excesses of Wall Street on the front page and we’ll make it clear to everyone that the Democrats are against the excesses of Wall Street.” [Bloomberg]
• Economist Mark Thoma wishes he could disagree with the contention that the reform proposals from the administration represent more than “a fairly transparent political stunt,” but for the record, he’s fine with banning banks’ prop trading desks and internal hedge funds, “as long as it’s done properly. From a P&L perspective, this is obviously bad for the Street. From a public policy perspective though, there’s really no compelling reason why the banks need to have prop trading desks or internal hedge funds.” Still, he says: “I don’t even know why I took the time to write about this, because there’s zero chance the proposals Obama announced today will ever be law. The two Senate staffers I talk to regularly both said their offices were basically ignoring Obama’s proposals, because even if the White House fights for them (which they won’t), Chris Dodd has no intention of inserting them into his committee’s bill.” [Economist’s View]
• (For his part, the Senate Banking Committee chairman says he “looks forward to studying the President’s proposal and will give it careful consideration as the Committee moves forward on financial reform.”) [Chris Dodd]
• Even if it did pass, Yves Smith at Naked Capitalism is skeptical of the mechanics: “How do you ‘limit’ prop trading in firms that have international operations?” she asks. “Without the famed ‘harmonisation’ with the UK and EU, I’m curious as to how this can be implemented as to not be circumvented.” [Naked Capitalism]
• In the end, not even Paul Krugman can gin up much enthusiasm for “Glass-Steagall 2.0.” On his blog, he deemed the plan: “OK,” but “I don’t think that too-big-to-fail is at the heart of our financial problems. Nor do I think a sharp separation between narrow banking depository institutions and other financial players is a silver bullet.” Financial institutions, he says, will almost certainly find a way to circumvent the rules, although he concedes that “in the context of a broader financial reform, this stuff could help.” Anyway: “Whatever. I’m still reeling from the collapse on health care.” [NYT]
