US - Obama's latest bank proposals could prompt sell-off

Deborah
22 January 2010

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The private equity assets of US banks could soon be under threat of a fire sale, following President Obama's announcement that he may prohibit banks from owning or making investments in private equity or hedge funds as part of a major shake-up of regulation in the wake of the financial crisis.

The proposal, fresh from from Tuesday night's shock Massachusetts by-election defeat, proposes that Congress stop banks from owning or sponsoring private equity or hedge funds that are "unrelated to serving customers".

This means that while banks will be able to manage assets on behalf of their clients, they will no longer be able to invest in their own funds or those of other private equity firms, which could lead to the closure of banks' private equity units. In an economic environment where investor money is scarce, this new proposal threatens to take out yet another source of funding.

The plan would also bar banks from running proprietary trading operations for their own profit.

The move is Obama's latest attempt to reduce the risk of yet another credit crisis by limiting the functions and trading activities of banks. It is arguable, however, that the idea fails to get to the heart of the problem, instead attacking an industry that is generally agreed to have had little to do with the downturn in the first place.