OBAMA AND THE US BANKS / THE FINANCIAL TIMES LEX ( RECOMMENDED READING )

Obama and US banks

Published: January 21 2010 15:03

Simple question: how will President Obama’s proposals affect US banks? Unfortunate answer: no one yet knows. The new scheme – which covers a ban on proprietary trading, a ban on ownership, investment in or sponsorship of hedge funds and private equity, and new limits on the overall size of banks – is vague and will doubtless change before it becomes a reality.

The detail will make a huge difference. For example, pure proprietary trading – investment by the bank on its own, not clients’ behalf – at JPMorgan Chase contributes well below 1 per cent of revenues. But much client trading involves taking balance sheet positions and then holding them. So when does client work cross the line into prop trading? Determining what constitutes “sponsorship” of a hedge fund will also be crucial. Asset management vehicles that take short positions (and in which some banks invest alongside clients) could be affected. But lending and advisory services, such as prime brokerage and leveraged finance, seemingly will not be.

Copyright The Financial Times Limited 2010.