Banks Already Finding Ways Around Obama Financial Reforms

Banks Already Finding Ways Around Obama Financial Reforms

January 22, 2010

Raw Story - On the same day that President Barack Obama announced an ambitious plan to reform the US financial system, bankers at the largest Wall Street institutions indicated that they are already finding ways around the proposed changes.

Sources at three Wall Street banks told BusinessInsider’s John Carney that “they are already finding ways to own, invest in and sponsor hedge funds and private equity funds” despite the proposed restrictions on those activities. One unnamed operative at a major bank said his firm expects the reforms to affect no more than one percent of its business.

President Obama announced two major reforms of the financial system on Thursday. The first would see the US in effect return to the separation of commercial and investment banking that was mandated by law until 1999, when that rule in the Depression-era Glass-Steagall Act was abandoned.

Many economists say allowing banks to be both lenders to the public and investors in large hedge funds and other securities contributed to the economic collapse of 2008.

The other rule would limit the size of banks, ostensibly to ensure that no banks are “too big to fail” and require taxpayer bailouts to keep the economy from collapsing.

But Wall Street bankers are pointing to a phrase in the proposed reforms — that banks will be barred “from proprietary trading operations unrelated to serving customers” — as an easy loophole to get around. John Carney reports:

The key phrase is “operations unrelated to serving customers.” The banks plan to claim that much of the business in which it engages is related in one way or another to serving customers…

A still more devious way is to have a bank’s own employees be the customers who are invested in the internal hedge funds. That way trading operations can remain closed to outsiders while the regulatory requirement of relating the trading to customer service is met. Goldman Sachs is rumored to be considering this approach ...