Obama Announces New Bank Rules

The banks that are too-big-to fail are about to be regulated in a way that will have them screaming. Either they can engage in proprietary trading or they can be banks, but the days of banks trading on their own account are gone. While Wall Street will complain and lobby, this is a sound move, supported by former Federal Reserve Chairman Paul Volcker, who is hardly a communist.

In announcing the change, President Obama said, "While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near-collapse. My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary."

Ralph Fogel, investment strategist at Fogel Neale Partners in New York, told Reuters, "This is going to have a tremendous impact on big-name brokerage firms, like Goldman Sachs and JPMorgan. If they stop proprietary trading, it will not only dry up liquidity in the market, it will change the whole structure of Wall Street, of the whole trading community."

And that is the idea. A bank should be a rock solid institution, not a casino. However, banks have become gambling enterprises in recent years, looking for a way to beat the market. Yet, their way to beat the market (which ultimately is themselves) is to leverage their balance sheets to the edge of insolvency. Any professional gambler will confirm that doubling down to get back to even is the worst way to work.

Unfortunately, it will take an act of Congress to make this rule stick. Earlier today, the Supreme Court ruled 5-4 that companies can spend money on political ads as part of their First Amendment rights. No prizes for guessing what Wall Street is going to do.

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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