Risky Business

President Obama’s new plan to stop big banks from taking big risks could be circumvented in dangerous ways having perverse effects on risk-taking says Bloomberg.com. “President Barack Obama’s proposal to impose limits on commercial banks may win him support on Main Street and shake up Wall Street without doing much to make the financial system safer overall. The plan, which is still lacking in details and must be approved by Congress, aims to make the banks more secure by forcing them to minimize the trading they do on their own account and give up their stakes in hedge funds and private equity firms. ‘It’s the right direction,’ said Henry Kaufman, president of Henry Kaufman & Co. in New York and a former vice chairman of Salomon Inc. The danger is that such risky activities could simply migrate to big non-bank financial institutions, leaving the system as a whole no better off. Banks also might try to make up for the loss of profits from proprietary trading by lending more to risky borrowers such as real estate developers, threatening the federal safety net, said Martin Baily, a former White House economist now with the Brookings Institution in Washington. ‘Beware of unintended consequences,’ said Robert Litan, vice president of research and policy at the Kansas City-based Kauffman Foundation, a group that promotes entrepreneurship, and a former Clinton administration budget official. ‘This could have perverse effects on risk-taking.’”