Obama's bank plan

Here's the gist of it: Commercial banks that take deposits from customers - that's the Wells Fargos and B of A's of the world - would no longer be able to invest on behalf of the bank itself, something called proprietary trading. No owning hedge funds or private equity funds. No investing that's solely for the sake of shareholders. Money will have to be made by servicing customers (what a novel idea!). From the WSJ:

Administration officials said the new rules would force major institutions from J.P. Morgan Chase to Bank of America to decide the direction of their business. Banks shielded from risk through federal-deposit insurance, or aided in financial crises by low-interest loans from the Federal Reserve Board, would no longer be allowed to engage in trading unrelated to their customers' interests, one senior administration official said.

This seems like a reasonable idea (one, by the way, that former Federal Reserve Chairman Paul Volcker had long been pushing). Big losses from bank investments played a huge role in the credit meltdown. From the NYT:

Mr. Obama said of the Troubled Asset Relief Program, the 2008 bank bailout: "That rescue, undertaken by the previous administration, was deeply offensive, but it was the necessary thing to do." But he said the financial system was "still operating under the same rules that led to its near-collapse," and vowed: "Never again will the American taxpayer be held hostage by a bank that is too big to fail." Under existing rules, he said, the banks "concealed their exposure to debt" through complex financial maneuvers, made "speculative investments," and took on "risks so vast that they posed threats to the entire system," Mr. Obama said.

The other proposal would involve tightening the limits on bank market share. Since 1994, no bank can have more than 10 percent of the nation's insured deposits, but Obama wants that cap to include non-insured deposits and other assets. As you might expect, the bankers are going ballistic this morning (one reason the Dow is down almost 200 points). U.S. banks not being able to trade would give foreign competitors a huge ace in the hole. It also would result in a big loss in tax revenue because banks have to pay taxes on all that buying and selling. Still, The Atlantic's Megan McCardle seems to feel it's a step in the right direction.

Even if it's not the best idea in the world, there are definitely many worse rules that we could think up. And after a stunning defeat on health care, the administration needs to score big points against the bankers quickly. If "Don't just stand there, do something!" is the order of the day, there are clearly worse somethings we can do.