President Barack Obama will propose stricter limits on financial risk-taking on Thursday in his latest populist-tinged move to crack down on banks and address the roots of the financial crisis.
The president will make the announcement at 11:40 a.m. EST. The guidelines, which are expected to be broad and would require congressional support, are part of measures to revamp the country's financial regulatory system.
The move comes on the heels of Goldman Sachs Group Inc's report of stronger than forecast fourth quarter profit and as the White House reels from a devastating political loss for Obama's Democrats in Massachusetts on Tuesday.
Before the announcement, Obama will meet with Paul Volcker, the former Federal Reserve chairman who heads his economic recovery advisory board and who favors putting curbs on big financial firms to limit their ability to do harm.
The proposal will include size and complexity limits, specifically on proprietary trading, and the White House will work closely with the House and Senate to work this into legislation, a senior administration official said.
Proprietary trading refers to a firm making bets on financial markets with its own money, rather than executing a trade for a client.
The White House has blamed the practice for reckless gambling on the U.S. property market that resulted in massive losses that almost destroyed the financial system in 2008 and spurred the taxpayer-backed $700 billion bank bailout to temper the most severe U.S. recession since the 1930s.
The announcement aimed to tap public rage over Wall Street excess after Obama's Democrats lost the late Senator Ted Kennedy's U.S. Senate seat in Massachusetts to Republican Scott Brown.
It's politically expedient to vilify these institutions, but that doesn't mean it's the right thing to do, said Walter Todd, portfolio manager at Greenwood Capital Associates in South Carolina.
They're trying to win back political points after losing the Massachusetts election. Obama comes out with something different every day for financial reform. It creates a very uncertain environment for these companies, he said.
Obama has cracked down on banks aggressively in recent weeks, proposing a tax last week on financial institutions to recover up to $117 billion in taxpayer money that went to the bank bailout.
The president's proposal on Thursday may include calling for a requirement that banks carry more capital on their books to back their dealings in certain financial products, such as over-the-counter derivatives, one industry lobbyist said.
It may also limit bank investment in, and ownership of, hedge funds, the lobbyist said.
The president was expected to call on Congress to include limits on the size and complexity of proprietary trading by banks in financial regulation reform legislation already being debated, financial industry lobbyists said.
The House of Representatives approved a sweeping financial regulation reform bill on December 11.
The Senate has not yet acted on the matter, but the Senate Banking Committee continues to seek bipartisan agreement on financial regulation reform.
Senator Christopher Dodd, banking committee chairman, met with committee members on Wednesday over dinner, said a source familiar with the discussions.
Dodd was expected to meet this week with Senator Richard Shelby, the top Republican on the committee.
An aggressive proposal was drafted last month by former Republican presidential nominee John McCain and Democratic Senator Maria Cantwell. Their measure would reinstate the 1930s-era Glass-Steagall limits on banking by barring large banks from affiliating with securities firms and being in the insurance business.
Passage of the Cantwell-McCain bill would force firms at the center of last year's financial crisis -- such as Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase and Wells Fargo -- to rethink their banking, investment and insurance operations.
Federal Reserve Chairman Ben Bernanke has signaled support for limiting banks' riskier activities, if they imperil other more stable portions of the firm. In November, he said supervisors should be allowed by law to insist that the company divest itself or shrink its activities.
But he stopped short of endorsing a reinstatement of Glass-Steagall, which he said would not be constructive.
(additional reporting by Karey Wutkowski and Alister Bull; Editing by Stacey Joyce)