President Obama on Wednesday said restructuring Wall Street banks so they make less of their profit through trading and pose fewer risks to the economy remains an “an unfinished piece of business,” in one of his most detailed critiques of the financial industry since his early days in office.
“We have to continue to see how can we rebalance the economy sensibly, so that we have a banking system that is doing what it is supposed to be doing to grow the real economy, but not a situation in which we continue to see a lot of these banks take big risks because the profit incentive and the bonus incentive is there for them,” Obama said in an interview with the Marketplace radio show. “Some of the work to get that done, though, involves restructuring the banks themselves -- how they work internally.”
The president’s comments indicated that he might be looking to pursue policies in his final two years that take aim at Wall Street, either acting through existing regulations or potentially through new legislation. They also reflected a growing economic populism in the country that is making both the left and right more skeptical of big corporations and potentially amenable to legislation that would scale back Wall Street’s role in the economy.
Obama said he believes the Dodd-Frank legislation passed in 2010 to tighten regulation of Wall Street is accomplishing important aims. It is requiring banks to hold more money in reserve, for instance, and providing new protections to consumers. Notably, the Dodd-Frank law established the Volcker Rule, a measure that requires banks to split off their trading arms. After years of struggle by regulators to implement the rule, it went into effect this year.
But, Obama added, more needs to be done.
“Right now, if you are in one of the big banks, the profit center is the trading desk, and you can generate a huge amount of bonuses by making some big bets; you will be rewarded on the upside,” he said. “If you make a really bad bet, a lot of times you've already banked all your bonuses. You might end up leaving the shop, but in the meantime everybody else is left holding the bag.”
Obama said Dodd-Frank set up mechanisms to ensure that if banks fail, taxpayers won’t be left as exposed as they did in 2008.
“But it's still not a real efficient way for us to run a financial system. That's going to require some further reforms. That's going to require us looking at additional steps that we can take,” he said.
Obama’s desire to shrink Wall Street’s role is notable because it differs from that of many of his advisers during his first years in office, when many liberals complained he did not go far enough in seeking to overhaul the financial industry. Advisers at the time like Timothy F. Geithner, the treasury secretary, and Lawrence Summers, the national economic adviser, did not believe that it was necessary to diminish Wall Street’s role in the economy for healthy economic growth.
How Obama might achieve further reforms to Wall Street is not clear. He has modest influence over the financial regulatory process through the Treasury Department’s oversight of coordinated rule-making among agencies such as the Federal Reserve and the Office of the Comptroller of the Currency. He can use moral suasion and his convening power as president.
But while Wall Street is sure to fight any significant reform, he might also find support on both sides of the aisle. Republicans such as Sen. David Vitter (R-La.) and Democrats such as Sen. Sherrod Brown (D-Ohio), who could become chairman of the Senate Banking Committee next year, have joined together to draft legislation further tightening the reins on the biggest banks.