David Prosser: Banks pay for Obama's unpopularity

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Outlook The voters of Massachusetts should watch out: the world's largest banks don't enjoy being crossed, but the bloody nose given to Barack Obama in this week's Senate election seems to have finally convinced the President to move aggressively against Wall Street.

For much of his first year in office, President Obama resisted calls to respond to the financial crisis with really radical reforms of financial regulation, preferring instead to remodel the existing structures. Yet within the past three weeks, he has announced three separate strikes on Wall Street, and each of them will have hurt.

First came the President's announcement that he planned a levy on the biggest banks operating in the US, under which they will have to pay getting on for $120bn (£75bn) to cover the country's losses from the crisis (an ongoing version of the levy, to insure against future crises, is also being discussed with other countries). Then Mr Obama revealed that he wants to launch a consumer protection agency to protect Americans from the big bad banks. And now he intends to go even further, with reforms that in all but name will return America's banks to the days of the Glass-Steagall Act's enforced separation of commercial and investment banking.

The banking industry has only itself to blame. Its response to Mr Obama's initially conservative approach to regulatory reform was to invest its energies in defending ever higher bonus pay-outs, paid for by the international bailout of the banking industry.

You would have thought the banks would have had the sense to see that whatever the rational arguments might be for their generous settlements, handing out billions of dollars worth of windfalls would lead to a public backlash – one that politicians might feel the need to respond to.

Only in recent months have the banks begun to get it. Goldman effectively paid a negative bonus for the final three months of last year, by not adding to its bonus pool and taking money out for charitable donations. Its rivals have also trimmed their pay-outs, typically by paying out smaller than usual percentages of revenues.

Those gestures have come too late to save them from the President's new-found sense of outrage over the behaviour of Wall Street. Having seen his ratings suffer – both in polling over the past three months and in Tuesday's vote in Massachusetts – Mr Obama now wants to be seen to be taking tough action.

And tough is the only way you can characterise yesterday's announcements. The President may not be formally resurrecting Glass-Steagall, but by insisting that commercial banks that rely on a state-backed safety net should no longer be allowed to also engage in risky trading activities on their own books, that is what he is doing.

You can tell the banks don't like it. Despite Mr Obama's intentions being widely trailed overnight, the price of financial stocks fell sharply as he began spelling out his plans in more detail. Buoyed by Goldman's results when the markets opened, banks very quickly gave up all their gains.

No wonder. While we have yet to hear exactly when and how these reforms will take effect – and despite the President's vows to face down the lobbyists, they will do their best on behalf of Wall Street – Mr Obama's announcement is a genuine step-change in his approach to regulatory reform. Until now, he has been content to change the way financial services institutions are regulated. Yesterday, he decided to begin forcing through changes of the institutions themselves.

There are interesting parallels here with Britain's own debate about regulatory reform. The UK Government has also been cautious, despite an increasingly high-profile campaign from the Governor of the Bank of England for the same sort of attack on "too big to fail" institutions as Mr Obama has just announced.

Will Gordon Brown be tempted to follow suit? Maybe. Our own banks – we're talking to you, Royal Bank of Scotland – don't seem to have got the message about public fury any more than their American equivalents.