Banks mobilise lobbyists as Obama declares war

President Obama chose the day Goldman Sachs announced record profits to finally come down on the banks, throwing the industry into turmoil and demanding the most far-reaching reform of Wall Street since the 1930s.

Channelling popular outrage, Obama proposed limits on size and scope of the huge banks that nearly brought down the economy by taking "huge, reckless risks in pursuit of quick profits and massive bonuses".

Under the proposed changes, banks will be prohibited from owning, investing, or sponsoring hedge fund or private equity funds and from engaging in proprietary trading - using their own funds to make hefty bets.

The influence of former Federal Reserve chairman Paul A Volcker (above) is all over Obama's proposals. He, along with Bank of England's Mervyn King, has long proposed that banks should have their commercial and investment banking arms separated.

Obama calls this the Volcker Rule and it is likely that Goldman Sachs will be among the hardest hit. The proposals shocked banking analysts, who say some of the new restrictions go beyond the Depression-era Glass-Steagall Act that was repealed in 1999.

As a result, the Dow fell by two per cent yesterday, as bank shares took a hit - Goldman Sachs down four per cent, JP Morgan Chase off seven per cent and Bank of America six per cent.  British banks with a serious American presence also fell, with RBS down seven per cent and Barclays three per cent.

Obama's reforms demand the restructuring of some of the biggest names in US banking – including JP Morgan Chase and Goldman Sachs. "You can choose to engage in proprietary trading, or you can own a bank, but you can't do both," one official said. Obama promised that "never again will the American taxpayer be held hostage by a bank that is too big to fail".

The industry clearly knew something bad was coming. Goldman Sachs, in posting a fourth quarter net profit of $4.95bn compared with a loss of $2.12bn for the same period in 2008) slashed its 2009 bonus pool from an estimated $22 billion to $16.9 billion in an effort to deflect attention away, though that still allows for an average bonus of just under $500,000 per employee . In December, Goldman announced that its top 30 executives would be paid only in stock; now, nearly everyone on Wall Street is waiting to see how much stock will be awarded to Goldman CEO Lloyd Blankfein who did not receive a bonus in 2008.

Some bankers are even concerned that having already imposed his $90bn tax on bank profits last week to help recoup the TARP deficit, Obama could follow Britain's lead and create an extra tax on bank bonuses. "They [the banks] got the message that politically they can't be paying out close to 50 per cent of revenues anymore, at least for the time being," says Keith Davis, an analyst at Farr, Miller & Washington.

Obama - still stinging from a electoral rebuke in Massachusetts on Tuesday when Republican Scott Brown won Ted Kennedy's senate seat - believes the issue is an easy winner. But does the President really understand where the risks lie and how do you define risky? For an operation like Goldman only about 10 per cent of total revenue - or roughly $4.5 billion - comes from pure proprietary trading.

Politically, the Republicans may not be willing to sign up - especially if banks mobilise to strenuously lobby against the new rules. Some banks and investor groups are moving quickly to do just that. "It will reduce liquidity and increase risk," noted one lobbyist last night. "That is the direct opposite of the goals we want to achieve." ·