The Volcker Rule

The White House announced its major initiative today.

Declaring that huge banks had nearly brought down the economy by taking “huge, reckless risks in pursuit of profits,” President Obama on Thursday proposed legislation to limit the scope and size of large financial institutions.
The changes would prohibit bank holding companies from owning, investing, or sponsoring hedge fund or private equity funds and from engaging in proprietary trading — what Mr. Obama called the Volcker Rule, in recognition of the former Federal Reserve chairman, Paul A. Volcker, who has championed the restriction.
In addition, Mr. Obama will seek to limit consolidation in the financial sector, by placing curbs on the growth of the market share of liabilities at the biggest firms. An existing cap, put in place in 1994, put a limit of 10 percent on the share of insured deposits that can be held by any one bank. That cap would be expanded, officials said, to include liabilities other than deposits.
Both changes require legislation by Congress, and Republican leaders, as well as the banking industry, signaled on Thursday that they would resist the proposals.

This is a big deal and I expect most of the proposal to pass. I think this will have a major impact on the hedge fund industry. I’m also surprised that Tim Geithner has been tossed overboard.
I suspect that when a discussion is held on a future financial crisis, someone will say, “Well, it all started back in January 2010 when the government decided…”

Posted by on January 21st, 2010 at 2:35 pm


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