WASHINGTON (CN) – President Obama unveiled new proposals Thursday to prevent banks from growing too big and stop them from using their unique safety nets and perks to make excessive profits. “I’m proposing that we prevent the further consolidation of our financial system,” Obama said in remarks from the White House. “The American people will not be served by a financial system that comprises just a few massive firms.”
While the House has already passed legislation that would give regulators the authority to wind down large and risky firms, the new measure would force regulators to restrict the size of firms regardless of their stability.
The proposal would expand to other financial institutions a 1994 measure that caps the volume of deposits in a single bank.
Obama also proposed that banks be barred from trading stocks, derivatives or other financial instruments with their own money in their efforts to make profits for themselves instead of their customers. “We should no longer allow banks to stray too far from their central mission of serving their customers,” Obama said.
In a telephone conference before the remarks, top administration officials said they want to bar banks from proprietary trading because it would be improper for them to use bank safety nets – like federal deposit insurance and cheaper loans – to back their investments for private profit. “You can’t do both,” said one official.
During his address, Obama also noted that such investments create a potential conflict of interest because banks might favor profits from their risky investments over their customers. “We cannot accept a system in which shareholders make money on these operations if the bank wins, but taxpayers foot the bill if the bank loses.”
Losses from such investments – like mortgage-backed securities – are blamed for contributing to the financial crisis.
Administration officials said that they hope to include the reforms in financial legislation coming out of Congress. The House already passed a bill last month that would set up an independent Consumer Financial Protection Agency to oversee mortgages, credit cards and other financial products, extend bank oversight to cover other financial institutions, and give regulators the authority to break up large firms they consider threatening to the financial market.
A similar bill is working its way through the Senate.
Obama’s announcement comes the same day Goldman Sachs announced record profits in 2009, at $13.4 billion. The company diverted $500 million from bonuses to charities in the forth quarter, which its chief financial adviser, David Viniar, said was in recognition of the continued financial hardship felt around the world. Nonetheless, each company employee will have earned an average of nearly half a million dollars for 2009.
The company received bailout funds but has since repaid the money with interest.
Thursday’s announcement trails others as Obama takes heat for persistent hefty bonuses reported among recipients of the costly bailout.
He also proposed a new fee last week on the nation’s largest banks to fully recover the losses of the Troubled Asset Relief Fund, which is estimated to cost $117 billion. And Obama told senior lawmakers this week that he wants an independent consumer protection agency as part of the financial reform package.
“We’ve come through a terrible crisis,” Obama said while wrapping up his remarks. “The American people have paid a very high price. We simply cannot return to business as usual. That’s why we’re going to rein in the excess and abuse that nearly brought down our financial system. That’s why we’re going to pass these reforms into law.”