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Barack Obama is proposing the biggest shake-up of Wall Street since the Thirties in a move that will have massive implications for the British banking sector.
In a speech tonight, the US President will propose rules that will stop so-called “commercial” banks — which take deposits from the public — from dealing in shares on their own account.
If it becomes law it would force banks such as Morgan Stanley, JPMorgan and Citigroup to split their retail business from their investment banking operations, a state of play that would restore the 1933 Glass-Steagall Act brought in after the Great Depression began 1929.
Bank of England Governor Mervyn King has long argued for a similar approach here, which would force banks such as the Royal Bank of Scotland to split into two.
Mr Obama's proposals also seek to limit the size of financial institutions, ending the existence of banks which are “too big to fail”. The move would also affect Goldman Sachs, which became a commercial bank during the latest crisis so it could accept government loans. It would have to give up that status under these proposals.
Goldman has shown that it continues to dominate stock trading in London and Wall Street, helping it to profits that smashed expectations. The investment bank made $4.95 billion (£3.1 billion) in the fourth quarter on revenue which topped $9.6 billion. That takes profits for the year to $13.4 billion and revenues to $45.17 billion.
The share trading arm continues to be a huge source of income, whether the bank is investing on behalf of clients or for itself.
It took in $6 billion in the last three months alone, up from $4.2 billion in the same period a year earlier.
The bank has been criticised lately for placing trades before it recommends them to clients and sometimes even betting against positions taken by its customers. A recent email to clients from Thomas Mazarakis, head of Goldman's fundamental strategies group, warned: “We may trade, and may have existing positions, based on trading ideas before we have discussed those trading ideas with you.”
Fixed-income trading slowed after extraordinary profits in the past three quarters.
Revenue from fixed income, currency and commodities was $3.97 billion, down from $5.99 billion last quarter. But investment-banking revenue moved higher, rising 82 per cent from the previous quarter to $1.64 billion.
Reader views (2)
Oh dear, Mr English. Glass Steagall was about banks underwriting capital issuance by companies and the attendant risk of being left with stock - nothing whatsoveer to do with prop trading. What everyone fails to appreciate is that if someone doesn't like how Goldman or anyone else trades, then they have the option of not doing business with them. Hardly difficult to grasp.
- Peter Bench, London, 22/01/2010 13:11
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Unintended consequences spring to mind. Only countries with significant cash piles and strengthening banks shoul attempt such a move. China and India to run the global banking system sooner rather than later?
- Abominable Snow Man, London, 22/01/2010 12:33
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