Market

Jan. 21 (Bloomberg) — President Barack Obama, tapping into voter anger over bank bailouts, called for limiting the size and trading activities of financial institutions as a way to reduce risk-taking and prevent another financial crisis.

The proposals, to be added to an overhaul of regulations being considered by Congress, would prohibit banks from running proprietary trading operations solely for their own profit and sponsoring hedge funds and private equity funds. He also proposes expanding a 10 percent market-share cap on deposits to include other liabilities such as non-deposit funding to restrict growth and consolidation.

Obama made the statement at the White House after meeting with former Federal Reserve Chairman Paul Volcker, who has been an advocate of taking such steps.

The proposals could affect trading at some of the nations largest banks, including New York-based Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co., said Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. Banks conduct proprietary trading for their own benefit, not for that of their clients.

JPMorgan, Morgan Stanley and Bank of America Corp. tumbled more than 5 percent in New York trading, leading the S&P 500 Financials Index down as much as 3.3 percent, its biggest decline since October. Goldman and Citigroup Inc. dropped more than 4 percent.

Congressional Approval
The plan is subject to approval by Congress, where the presidents earlier regulatory proposal has hit resistance from some lawmakers and opposition from financial firms. Financial industry executives, lobbyists and analysts were critical of the proposal.

http://bloomberg.com/apps/news?pid=20601087&sid=an1RUYC9UqAY&pos=1

Video Copyright MSNBC 2010

Obama proposes proposal bank limitations limits size hedge funds derivatives JP Morgan Morgan Stanley Bank of America Goldman Sachs Paul Volcker

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In recent years, a confluence of factors created a new reality in the world of equity trading. The emergence of ultra sophisticated electronic trading methods, simultaneously with stock exchanges converting to for-profit and the SEC’s Regulation NMS, have brought on an explosion in trading volume.

Compounded by flawed regulation and lax oversight, this new marketplace is dominated by tech savvy, secretive, predatory and highly profitable trading programs, exploiting traditional investors who are usually oblivious.

High frequency trading systems are proprietary computer programs whose automated algorithmic software initiates trades with the goal of collecting rebates from the exchanges and/or detecting institutional order flow, and then execute buy/sell orders ahead of that flow.

These programs are designed to automatically front run investors. They have an information advantage, and they unnecessarily increase volatility, cause retail and institutional investors to chase artificial prices, make markets less efficient and systematically transfer wealth away from ordinary investors.

They also have a huge market share, and thus often dominate the market and determine its direction. Their hidden cost adversely impacts the financial well-being of all of us.

Some very large and well known Wall Street institutions are involved in this practice. Ever wondered how Goldman Sachs is making so much money so soon after the financial system nearly collapsed? High-frequency trading is one answer: recall that Goldman Sachs recently sued a former employee for allegedly stealing certain trading software Goldman said is responsible for substantial trading profits.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com

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Commanding Heights: The Battle for the World Economy

NARRATOR: Globalization did not cause global poverty, but it did make us more aware of it. And by creating a single global market, it raised the question of how that market benefits the world’s poorest nations.

DANIEL YERGIN: We are seeing around the world a movement towards greater reliance on markets, greater confidence in markets. But for that confidence to last it has to be seen that these markets are fair, that they are delivering the benefits widely, that people are benefiting from them. And if they don’t have that kind of legitimacy, then the confidence is not going to remain, and the markets will be vulnerable to disruption and be replaced by other kinds of controls. So every day the market has to earn and prove its legitimacy, and that’s a big test, particularly in the developing world, where the number-one issue, the central preoccupational concern, is the issue of poverty, and delivering the goods means lifting people out of poverty. And that more than anything else is what these markets would be judged by.

JEFFREY SACHS: Professor of Economics, Harvard University: The world is more unequal than at any time in world history. There’s a basic reason for that, which is that 200 years ago everybody was poor. A relatively small part of the world achieved what the economists call a modern economic growth. Those countries represent only about one-sixth of humanity, and five-sixths of humanity is what we call the developing world. It’s the vast majority of the world. The gap can be 100-1, maybe a gap of $30,000 per person and $300 per person. And that’s absolutely astounding to be on the same planet and to have that extreme variation in material well being.

Watch all of Commanding Heights at PBS.org

http://www.pbs.org/wgbh/commandingheights/hi/story/index.html

Duration : 0:7:28

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