January 21, 2010 / 6:03 PM / 9 years ago

Obama takes on "too big to fail" U.S. banks

WASHINGTON (Reuters) - President Barack Obama on Thursday ratcheted up his combative stance toward Wall Street by rolling out a plan aiming to prevent U.S. banks from becoming “too big to fail.”

The proposal would rein in banks’ trading activities and their ability to grow.

It is in keeping with a more populist approach on the U.S. economy that Obama has begun to emphasize and comes two days after his Democratic party suffered a crushing loss in a Senate race in Massachusetts.

Here is a look at the politics behind Obama’s announcement and how the proposal may fare in the U.S. Congress, which must approve it.

* Voters are furious that many Wall Street firms are now flush with profits and handing out big bonuses as the rest of the country grapples with 10 percent unemployment. Obama is seeking to tap into that anger.

* It comes a week after the president, who has referred to Wall Street executives as “fat cats,” unveiled a separate proposal to slap a new tax on big U.S. banks.

* Obama and the Democrats are worried that the loss of the Senate seat in Massachusetts will bode poorly for the party in November congressional elections. The White House, which focused heavily last year on trying to pass a broad overhaul of the healthcare system, wants to reassure voters the party is squarely focused on the economy.

* While its stance toward Wall Street has been anything but friendly in recent weeks, the Obama administration has been accused by some liberal supporters of being too cozy with the U.S. financial community. U.S. Treasury Secretary Timothy Geithner, former head of the New York Federal Reserve bank, and senior Obama economist Lawrence Summers are viewed by some as being too sympathetic to Wall Street’s interests. The proposal further helps to insulate the administration from that criticism.

* Obama unveiled the proposal while standing beside former Federal Reserve Chairman Paul Volcker, who was one of the president’s most influential advisers during his 2008 campaign. But Volcker, who chairs a panel of outside experts advising the White House, has complained to friends he has felt marginalized over the past year.

* Volcker has been outspoken in calling for a more robust set of financial regulatory reforms than the broad proposal the administration unveiled in June. He has expressed particular concern that many newly consolidated financial firms were becoming “too big too fail.”

* The announcement signals Volcker is regaining his clout. Obama dubbed the rule prohibiting banks from investing in hedge funds and limiting their trading activities “the Volcker Rule.”

* The proposals Obama unveiled will be considered as part of the broad package of reforms the U.S. Congress is considering. The House passed a version of the bill and the Senate is now considering it.

* One risk for Obama is that Republicans will accuse him of being anti-business. Banks are sure to lobby heavily to try to thwart the new proposals. Shares of big banks fell on the announcement, pulling down broader U.S. stock indices and the dollar.

Editing by Howard Goller

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