Legions Would Be Hurt By Obama Bank Rules

There may be merit in Obama’s notion of limits on the size and activities of banks. Banks that trade for their own accounts may be a different and more dangerous beasts than banks that hold deposits and make loans. But, leverage has its advantages which often helps shareholders, employees, and the businesses that banks fund.

The Obama rules might force the largest banks to close or sell their private equity funds. Those banks make sure that these divisions are well-funded so that they can compete for large deals. And, private equity has moved further into the business of putting money into emerging companies. A government forced cutback on bank activity could cut the pool of potential investors in promising enterprises, a role the Treasury will certainly not replace with taxpayer money.

Proprietary trading profits at firms like Goldman Sachs  (GS) make up a huge part of its profits most quarters. The investment bank’s shareholders would be badly damaged if Goldman could not support many of its trading desks. The same holds true of other firms that trade for their own accounts. Hundreds of billions of dollars in market cap, the value of shareholder investments, could be destroyed if the earnings from trading operations like Goldman’s were destroyed by new regulation.

Risks has its pitfalls but it also has its reward. The by-products of those reward include the creation of shareholder value, the creation of jobs in the financial sector, and capital that can be put into emerging American companies. Obama does not have an answer about how those things would be replaced if his proposals become laws.

Douglas A. McIntyre