New Bank Rules Sink Stocks; Obama Proposal Would Restrict Risk-Taking by Biggest Firms as Battle Looms
WASHINGTON--President Barack Obama proposed new limits on the size and activities of the nation's largest banks, pushing a more muscular approach toward regulation that yanked down bank stocks and raised the stakes in his campaign to show he's tough on Wall Street.</br></br>With former Federal Reserve Chairman Paul Volcker at his side, Mr. Obama said he wanted to toughen existing limits on the size of financial firms and force them to choose between the protection of the government's safety net and the often-lucrative business of trading for their own accounts or owning hedge funds or private-equity funds. Mr. Volcker has been an outspoken advocate of such rules; until recently Mr. Obama's top economic advisers, including Treasury Secretary Timothy Geithner and Lawrence Summers, were less than enthusiastic.</br></br>"Never again will the American taxpayer be held hostage by a bank that is too big to fail," Mr. Obama said Thursday, two days after voters crimped his ability to pursue his agenda by sending a Republican to the Senate to fill a vacancy created by the death of Edward M. Kennedy. The election deprived Democrats of the 60 votes often needed to get major measures through the Senate.</br></br>Administration officials said they weren't trying to resurrect the Depression-era law--known as Glass-Steagall--that strictly divided commercial banks from the business of underwriting securities. Nor would their proposals force existing financial firms to downsize, officials said.</br></br>If accepted by Congress, the Obama proposals could force significant changes in how the nation's biggest banks do business. The specter of new profit-crimping regulation battered bank stocks Thursday, dragging down the Dow Jones Industrial Average by 213.27 points, or 2%, to 10389.88. Some financial stocks sank by more than 5%, though they recovered slightly after Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said the new rules would take effect over three to five years, not immediately. J.P. Morgan Chase & Co.'s stock was the hardest hit, sinking 6.6%.