Obama proposes sweeping reforms for banks

A year after the collapse of Lehman Brothers, President Obama told an audience of bankers that their industry could drag the United States into another recession if it did not submit to sweeping regulatory reform that would discourage bloated bonuses and end the era of banks that were “too big to fail”.

In a speech symbolising Washington’s new role as Wall Street’s policeman and underwriter, Mr Obama scolded companies that he said were ignoring the lessons of the financial crisis, and set out a four-point plan to prevent it happening again.

He promised a new consumer protection agency to end the mis-selling of loans and mortgages to American homeowners; an expanded role for the Federal Reserve in monitoring the country’s biggest banks and insurance companies; new rules requiring stronger capital ratios for all lenders; and the establishment of a “resolution authority” to protect customers — if necessary at shareholders’ expense — when big companies go to the wall.

“The reforms I’ve laid out will pass and these changes will become law,” Mr Obama said, in far more confident language than he has used on the healthcare issue that continues to hobble his domestic agenda.
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He has asked congressional Democrats to deliver a package of regulatory reforms by the end of the year and pledged yesterday to continue to lead a co-ordinated drive to close loopholes in international financial regulation at next week’s G20 summit in Pittsburgh. The President acknowledged that the process had begun at the last G20 summit in London in April but did not mention Gordon Brown by name.

Mr Obama reserved his strongest language for the issue of executive pay but appeared to accept that a mandatory cap would be counterproductive, if not politically impossible. He welcomed, and took much of the credit for, the first signs of financial recovery and the repayment of $70 billion (£42 billion) of federal guarantees to banks in recent months. However, he warned that “there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis ... they are choosing to ignore them.”

He insisted: “We will not go back to the days of reckless behaviour and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.”

Mr Obama later returned to the subject with a plea for immediate self-regulation.

Few chief executives of big banks were in his audience, but several senior executives who attended were careful to sound supportive despite his rebuke. Richard Parsons, chairman of Citigroup, said: “Compensation’s a hot button issue and he’s outlined a conceptual approach that’ll take people some time to get their minds around. The sensible ones among us are trying to rise to the President’s expectations.”

Gary Cohn, president and chief operating officer of Goldman Sachs, said that his bank was happy to discuss its compensation policy and had no objection to the proposal by the Securities and Exchange Commission to give shareholders a non-binding vote on executives’ pay.