While you were sleeping: Obama takes aim at big banks

Friday 22nd January 2010

President Barack Obama has moved to renew his reform agenda, proposing to limit the trading activities of America’s banks so that the nation won’t ever again “be held hostage by a bank that is too big to fail”.

Not surprisingly, stocks tumbled, led by the banks amid concerns corporate profits could be crunched.

Obama’s plans could limit Goldman Sachs, Morgan Stanley and JP Morgan. The president is seeking approval for proposals that would prohibit banks from proprietary trading or investing in either hedge or private equity funds.

“If these folks want a fight, it’s a fight I’m ready to have,” Obama said, just two days after his party lost a key Senate election which has put his efforts to reform the health sector on hold.

Obama also proposed limiting consolidation of the financial sector by putting broad limits on the growth of the market share of liabilities at the largest financial firms, supplementing existing caps on the market share of deposits.

At midday, the Dow Jones Industrial Average was 1.88% lower, the Standard & Poor’s 500 was 1.6% lower and the Nasdaq Composite had shed 1.11%.

Among the decliners were JP Morgan and Morgan Stanley, each down more than 5%. Goldman fell 5% even after it reported better than expected fourth-quarter results. Bank of America and Citigroup also fell.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’ surged 12.7% to 21.06.

The selling in the financial sector spilled into other sectors too. Exxon Mobil and Freeport-McMoRan Copper slid, following oil and metal prices lower. Part of the reason why commodities fell was linked to concerns that China is prepared to slow economic growth.

Chinese authorities this week said they have told that country’s bankers to slow lending.

Oil fell below US$77 a barrel for the first time this year, while gold fell almost 2% to US$1090 an ounce, its lowest so far in 2010.

The Dow Jones Stoxx 600 dropped 1.4% to 252.71. Seventeen of the 18 national benchmarks in Western Europe fell. The FTSE 100 fell 1.6%, Germany’s DAX fell 1.8% and France’s CAC 40 dropped 1.7%.

The European equivalent of the VIX, the VStoxx Index, surged 12% to a six-week high of 26.14.

At a Hong Kong financial conference, Nouriel Roubini issued a warning for investors about the outlook for global equities.

“The real economy is gradually recovering but since March, asset prices have gone through the roof,” Roubini said, according to Bloomberg. “If I’m correct, by the second half of the year, there’s going to be a slowdown of growth in U.S., Europe and Japan. That could be the beginning of a market correction because the macroeconomic news is going to surprise on the downside."

Any decline in commodities might be limited because of demand for raw materials from emerging markets, he said.

Obama’s bank plans reverberated through the currency market with the yen the key beneficiary.

The euro decreased 0.8% to 127.69 yen at 12:14 p.m. in New York, from 128.68 a day earlier. The dollar fell 1% to 90.30 yen, from 91.24. The dollar slid 0.2% to US$1.4139 versus the euro, compared with US$1.4106.

The Kiwi dropped 2.3% to 64.34 yen. Sterling fell after a report showed the U.K.’s budget deficit widened last month. The U.K. Office for National Statistics said in London that Britain had a 15.7 billion-pound budget deficit last month, compared with 13.8 billion pounds a year earlier.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.096% to 78.28.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 0.55% to 277.95.

U.S. copper futures edged higher on hopes for continued Chinese demand. Benchmark copper for March delivery HGH0 rose 1.20 cents to US$3.3670 per pound at 10:21 a.m. EST on the New York Mercantile Exchange's COMEX division.

Businesswire.co.nz

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