WASHINGTON - Embracing Depression-era policy and populist politics, a combative President Barack Obama chastised big Wall Street banks Thursday and urgently called for limits on their size and investments to stave off a new economic meltdown.
Investors responded by dumping bank stock, sending shares of Bank of America, JPMorgan Chase & Co. and Citigroup Inc. down more than 5 percent and the Dow tumbling 213 points, providing yet another dire sign for recovery.
Obama's rhetoric covered the whole financial industry, but the key changes will affect only a few high-profile players, including JPMorgan, while sparing investment banks like Goldman Sachs. The move could undercut Treasury Secretary Timothy Geithner's strategy of maintaining close ties with the financial industry as part of the administration's overhaul efforts.
"We have to get this done," Obama said at the White House. "If these folks want a fight, it's a fight I'm ready to have," the president said, pivoting the White House focus from health care to an economy that has been slow to recover during his first year in office. "The American people have paid a very high price. . . . That's why we're going to rein in the excess and abuse that nearly brought down our financial system."
Obama's announcement included changes that have been advocated for more than a year by former Federal Reserve Chairman Paul Volcker - who appeared with the president at the White House - particularly by endorsing Volcker's proposal to ban banks that take deposits from also trading stocks for their own profit. The change would separate commercial banks from investment banks, a line that was blurred a decade ago by the repeal of the Depression-era Glass-Steagall Act.
That won't help, suggested Rob Nichols, president of the Financial Services Forum, an industry group representing 18 of the largest financial companies.
"Proposals to preemptively break up large, well-managed and well-capitalized banking companies - or to reimpose Glass-Steagall restrictions - are based on a misdiagnosis of the causes of the financial crisis," he said.
The administration also would change an existing cap that limits a bank from holding more than 10 percent of the deposits insured by the Federal Deposit Insurance Corp. It was unclear how many banks the change would affect, but they would include Bank of America, JPMorgan and Citigroup.
But not investment banks like Goldman Sachs and Morgan Stanley, which don't take consumer deposits. They became banking companies during the financial crisis, to gain access to discount loans from the Federal Reserve. Now that the financial system has stabilized, there is nothing keeping them from becoming non-banks without changing their businesses.
Yesterday at the White House, President Barack Obama said the U.S. financial system is "still operating under the same rules that led to its near collapse." To avoid a repeat of the financial crisis, Obama suggested tough new proposals, which include:
Barring commercial banks from running proprietary trading operations solely for their own profit
Barring commercial banks from sponsoring hedge funds and private equity funds
Expanding a 10 percent market-share cap on deposits to include other funding sources as a way to restrict growth and consolidation
Limits on the use of insured deposits to fund financial speculation