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Obama Takes Aim At Bank 'Excess'

U.S. President Barack Obama delivers his speech on financial reform Washington, D.C.
(RFE/RL) -- U.S. President Barack Obama has unveiled far-reaching plans to limit the size of banks and place restrictions on their financial risk-taking.

It's a response to public anger over bank bailouts and bonuses and what Obama called the "excess and abuse" that nearly brought down the financial system. The plans -- which need Congressional approval -- have sent stock markets tumbling.

Accompanied by adviser and former Federal Reserve Chairman Paul Volcker, Obama said the new rules were necessary to avert future financial crises. And if opponents wanted a fight, he said, they would get one.

"We've come through a terrible crisis. The American people have paid a very high price. We simply cannot return to business as usual. That's why we're going to ensure that Wall Street pays back the American people for the bailout. That's why we're going to rein in the excess and abuse that nearly brought down our financial system," Obama said.

The plan has two main elements. Banks would be barred from making bets on financial markets with their own money -- rather than on behalf of a client -- and for their own profits. The practice, known as proprietary trading, has been hugely profitable, but is also risky if the bets go wrong.

The second part would place as yet unspecified limits on the size of financial institutions. That's designed to make sure no one firm becomes so large it poses risks to the entire financial system.

The proposals -- which still need Congressional approval -- might require some of the big U.S. banks to shed parts of their business. The plans come amid much public anger over the large bonuses being paid by big Wall Street firms -- and after a year in which large parts of the financial system were bailed out by the taxpayer.

They have prompted comparison with an earlier piece of legislation known as the Glass Steagall Act.

Brought in during the Great Depression of the 1930s, the act separated commercial banks -- those that take in deposits and make loans -- from investment banks. Its repeal in 1999 has been blamed by many for contributing to the current crisis.

Some proponents of financial reform have welcomed the Obama proposals. But critics say the new rules won't address the type of bets that got banks and financial firms into the current mess.

Chief among them were the complicated financial instruments, many based on mortgages, that turned sour with the falling housing market. Stock markets in the U.S., Asia, and Europe all fell on Obama's announcement, led by drops in bank shares.

Some financial institutions have criticized the Obama plans, saying they are misguided and will curb profits.

Stephen Massocca, the managing director of the California-based investment banking firm Wedbush Morgan, says, "Presumably a lot of the risk-taking trading and risk-taking investing that banks are doing today would essentially be prohibited. And so clearly that would have some kind of impact on their ability to make money."

The initiative comes just days after Obama suffered a political setback when the Democrats were defeated in the Massachusetts Senate race.

That deprived Obama of his so-called Senate supermajority and could complicate passage of his healthcare reform plans -- and, possibly, this new banking initiative.

compiled from agency reports