Geithner voiced concern on US bank limits-sources

WASHINGTON/NEW YORK (Reuters) - President Barack Obama's newest Wall Street crackdown was met with hesitation from Treasury Secretary Timothy Geithner, who voiced concern that politics could sacrifice good economic policy, according to financial industry sources.

Geithner is concerned that the proposed limits on big banks' trading and size could impact U.S. firms' global competitiveness, the sources said, speaking anonymously because Geithner has not spoken publicly about his reservations.

He also has concerns that the limits do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown, the sources said.

A White House official said both Geithner and Lawrence Summers, the director of Obama's National Economic Council, worked closely with Paul Volcker, who heads a White House economic recovery board, in developing the proposals.

"The plan was submitted to the president with a unanimous recommendation from the economic team," the official said.

Obama's proposals would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.

Obama called for a new cap on the size of banks in relation to the overall financial sector that would take into account not only bank deposits, which are already capped, but also liabilities and other non-deposit funding sources.

A separate administration official noted that Geithner had backed a proposal last fall that did make it into a regulatory reform bill that passed the U.S. House of Representatives that would have given regulator power to curb a firm's size.

The new proposals are late additions to a reform effort the administration kicked off last year when it sent thousands of pages in suggested financial rule changes to Congress last year.

They come as the administration has sharpened its rhetoric against Wall Street where the announcement was met with disdain. Bank shares slid and the dollar fell against other currencies.

The proposals were largely driven by Volcker, a former Federal Reserve chairman who has repeatedly advocated putting curbs on big financial firms to limit their ability to do harm.

The White House official said Obama's economic team considered the concern that proprietary trading was not at the heart of the problems that fueled the financial crisis.

But it concluded that reform needed to be about more than just fighting the last war, it needed to address sources of future risk as well, the official said.

Lawrence White, a professor at New York University's Stern School of Business and a former regulator, said Obama's proposals were "a solution to the wrong problem."

"They have this rhetoric that it was proprietary trading that was the problem," White said. "That's wrong."

Obama has recently tried to capitalize on populist anger against the big banks, proposing last week a major tax on banks to recoup taxpayer losses related to the bailout.

He also ratcheted up the anti-Wall Street message when he campaigned over the weekend for Democrat Martha Coakley in her race for the Massachusetts Senate seat. Coakley lost that critical seat to Republican Scott Brown, who Obama painted as a friend of Wall Street.

Underscoring the high level of public anger at banks, a majority of 1,006 Americans surveyed in a Thomson Reuters/Ipsos poll said executive pay was too high.

(Reporting by Karey Wutkowski in Washington and Steve Eder in New York with additional reporting by Jeff Mason and Glenn Somerville; Editing by Kenneth Barry and Diane Craft)