US President Barack Obama’s administration on Wednesday moved to rein in the nation’s largest banks, sending Congress new rules blocking mega-mergers and barring investments seen as too risky.
With Obama’s presidency still dominated by the economic fallout from the banking crisis, the US Treasury sent lawmakers proposed new rules that would prevent financial firms from becoming “too big to fail.”
The rules would ban government-insured banks from mergers and takeovers if the new company would hold more than 10 percent of the sector’s debt, the proposals said.
Banks would also be barred from trading in stocks or other, sometimes risky, financial instruments for their own benefit — known as proprietary trading.
The Obama administration was forced to pump hundreds of billions of dollars into the US financial sector to cover losses from complex financial investments linked to the subprime mortgages.
Some commentators have said the financial meltdown was fueled by the elimination of rules that had forced banks to choose between proprietary activities and traditional activities, like making loans and collecting deposits.
Eyeing lightly regulated funds that are also blamed for spurring the crisis, the Obama administration called for banks to be prohibited from “sponsoring and investing in hedge funds and private-equity funds.”
Firms would have a two-year grace period before rules take effect.
The proposals must be passed by Congress before becoming law.
In January, Obama vowed “never again will the American taxpayer be held hostage by a bank that is too big to fail,” as he tapped into public anger at the role banks had played in the crisis and by huge Wall Street bonuses.
“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,” Obama said.
After that initial announcement, Wall Street gave an immediate thumbs down to the plans as US stocks plunged, with the blue-chip Dow Jones Industrial Average down more than 200 points or 2 percent.
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