Obama takes aim at banks

U.S. President Barack Obama proposedtough regulations Thursday that aim to limit the size and risk allowancesat financial institutions.

The proposal would limit banks' ability to engage in high-risk financial trading.

Restrictions would be placed on "proprietary trading" by commercial banks when banksinvest in securities using their own money,not just on behalf of clients to separate those institutions from investment banks.

The move is the second attempt in as many weeks to try torein in a sector that is generally believed to have been the instigator ofthe U.S. economy's recent financial woes.

"Last weekI proposed a fee to be paid by the largest financial firms in order to recover every last dime," Obama told reporters. "But that's not all we have to do. We have to enact common sense reforms that will protect American taxpayers and the American economy from future crises as well."

If the first aspect of the proposal is approvedbyU.S. legislators, banks will no longer be allowed to own, invest, or sponsor hedge funds, private-equity funds or proprietary trading operations for their own profit, unrelated to serving their customers, Obama said.

"When banks benefit from the safety net that taxpayers provide, which includes lower-cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit," Obama said.

The unwinding ofsome of that tradingadded fuel to the economic fires of late 2008 and 2009.

"These kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong," Obama said.

Because banks are backed by the Federal Deposit Insurance Corporation, shareholders make money on the trades when they go right, but taxpayers foot the bill when they don't, he said.

Mergers discouraged

The second prong of Obama's attack is aimed at preventing further consolidation within the sector by putting stiff requirements on future bank mergers. The rules are similar to legislation in Canada designed at halting bank mergers here.

"Never again will the American taxpayer be held hostage by a bank that is too big to fail," Obama said.

The industry is already bristling at the proposals.

"The better answer is to modernize the regulatory framework and not take the industry and the economy back to the 1930s," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry group that represents large Wall Street institutions.

The proposals came out on the same day that benchmark Wall Street investment firm Goldman Sachs Inc. announced it earned nearly $5 billion US in its recently completed quarter.

In focusing attention on Wall Street,Obama is seeking to halt a wave of public anxiety that is benefiting Republicans and undermining Obama's agenda. He has assumed a populist tone lately, calling big bank chief executives "fat cats" in a speech last week.

'Never again will the American taxpayer be held hostage by a bank that is too big to fail.' U.S. President Barack Obama

Obama appears to be stepping up his defence of Main Street after the Democrats' devastating loss Tuesday in the Massachusetts Senate race.

With that defeat, theparty lost its "supermajority" and the ability to push bills through Congress virtually unimpeded. Republican Scott Brown took a Massachusetts Senate seat that the Kennedy family had held for decades.

Republicans have vowed to block Obama's ambitious health-care reform bill, but it's believed they loosely support the U.S. president's attempts to overhaul the financial regulatory system.