By Michael D. Shear and Binyamin Appelbaum
Washington Post Staff Writer
Friday, January 22, 2010; A01
President Obama expanded his new offensive on Wall Street on Thursday, proposing rules that would impede the growth of the largest banks and bar them from making what he called "reckless" investments.
The proposal comes as the administration is shifting from its year-long effort to save financial firms toward a new willingness to confront them with explicit prohibitions on activities that fueled the economic crisis. In essence, Obama is now aiming to force the firms to choose between the federal benefits that come with being a bank and the unbridled pursuit of profits.
After opposing proposals such as hard limits on executive bonuses, the administration is embracing a tougher line -- more evidence that Obama has the industry in his sights as he seeks to show Middle America that he feels its economic pain.
Obama's plan would bar banks from making investments that are not intended to benefit customers, including the creation of proprietary investment funds solely to benefit employees and shareholders. New limits also would make it difficult for the largest banks to become any bigger, effectively stopping domestic expansion at well-known companies such as Bank of America and J.P. Morgan Chase.
While the proposed restrictions are narrower than the now-defunct law that segregated Wall Street trading from commercial banking for much of the 20th century, they share a similar goal: to subsidize banking -- which the administration considers vital to the economy -- without having taxpayers subsidize highly speculative activity.
Flanked by the members of his economic team in the Diplomatic Reception Room of White House, Obama chastised the chief executives of the nation's largest financial firms for sending what he called an "army of industry lobbyists" to fight his efforts to reform the banking sector.
"My message to leaders in the financial industry is to work with us, not against us," the president said. "If these folks want a fight, it's a fight I am ready to have."Wall Street responds
Wall Street has responded to the administration's increased hostility with its own change in temperature. Bankers howled last week when Obama proposed a fee on big banks to recoup losses from the government's $700 billion program to bail out financial firms. Several executives said Thursday that they regretted their support for -- and campaign donations to -- Obama.
"I wish I could take my vote back," said one executive at a large bank. He spoke on the condition of anonymity because his firm barred public comments on the matter.
As the industry seeks to defeat proposals to rein in banks, companies may now be free to spend more money on political campaigns after a Supreme Court decision Thursday reversed some key restrictions on political advertising by big businesses. Unless Congress acts quickly to reassert these limits, banks and other financial firms will be allowed to support congressional candidates who oppose Obama's bank proposals.
Bank stocks fell Thursday as investors reacted to the president's proposal. Goldman Sachs shares fell 4 percent in trading on the New York Stock Exchange. Citigroup dropped 5.5 percent, Bank of America fell 6 percent, and J.P. Morgan Chase dropped 7 percent.
The proposal is part of the White House's election-year strategy to repair damage done to Obama's image during his first months in office, when he helped bail out the banking industry, senior advisers said. The president's top political aides are hoping to set the stage for a sharp contrast with Republicans, who have historically opposed government prescriptions for private businesses.
"He had to help Wall Street in order to save Main Street," a top Obama adviser said, describing the White House's message for the midterm congressional elections. "Every time we announce an economic policy that Wall Street does not like, the Republicans are standing right there with Wall Street, defending them."
Republicans offered a muted response to the president's proposal, suggesting they recognize the political dangers of siding with big banks when there is a 10 percent unemployment rate, depressed housing prices and increased voter anger.
The White House wants Congress to incorporate the proposals into the sprawling financial reform legislation that passed the House. Rep. Barney Frank (D-Mass.) and Sen. Christopher J. Dodd (D-Conn.), who are overseeing the legislation in their respective chambers, stood with the president as he spoke and then issued statements of support. Frank noted that the House bill gave regulators the discretion to impose similar requirements, but he expressed support for stronger language mandating that regulators take action.Rebounding banks
White House advisers said the president has become more aggressive in recent weeks as it became clear that the big banks that received large amounts of government aid to stay afloat a year ago had rocketed back to profitability by making the same kind of risky investments that had gotten them in trouble.
Obama's announcement came as Goldman Sachs reported blockbuster earnings of $13.4 billion for 2009, the largest annual profit in the company's history. The firm sharply reduced the share of revenue devoted to bonuses but still pledged to pay an average of $498,000 per employee -- up 37 percent from 2008.
"When I see soaring profits and obscene bonuses . . . it's exactly this kind of irresponsibility that makes clear reform is necessary," Obama said.
Several industry representatives said they were concerned by the president's increasingly stern language, saying that the issues at stake are complicated and deserve to be discussed.
"There is a lot of concern in the banking industry, and by that I mean all banks, about the turn in the tone of the debate," said Edward L. Yingling, president of the American Bankers Association.
Obama officials said they did not discuss the new proposal with the industry before the president's remarks, a break with how the administration has announced its previous financial reform proposals. Treasury Secretary Timothy F. Geithner had dinner Wednesday night with several bank executives, but did not mention the president's plans. The executives learned about the proposal as early news reports about the proposal began appearing via e-mail shortly after the meal.
Staff writers David Cho and Brady Dennis in Washington and Tomoeh Murakami Tse in New York contributed to this report.