Bank Shot

President Obama proposed yesterday that banks should be prohibited from owning their own proprietary trading desks, among other restrictions. The idea here is that many large banks are now operating with infusions of cash from the American taxpayer. That gives them the opportunity to invest that money into various securities - but if they lose money on those investments, they can expect the American public to bail them out, since many of them are in the familiar "too big to fail" category. That creates a no-lose situation for the banks.

So the administration doesn't want banks to gamble with taxpayer money. But what then do we do about an institution like Goldman Sachs? Goldman is best known as an investment bank, except that in September 2008, it and Morgan Stanley officially changed their charters to become bank holding companies, freeing them up to build up their assets through retail deposits. That was supposed to help them avoid the leverage-heavy failures suffered by the likes of Bear Stearns and Lehman Brothers, who financed many of their transactions through bond deals. But the proprietary trading desk remains a big moneymaker for Goldman Sachs.

It was a totally different environment back then, a very dangerous one for the investment banks. Bear Stearns and Lehman had just collapsed; Merrill Lynch was on its way out. When Goldman announced its switchover, its stock was at $120; it was at $170 before Obama's announcement. The change away from calling itself an investment bank may have been a boon in the short term. But depending on where Obama's proposal goes, it may cause problems in the future.