Large Banks and Obama's Overhaul Proposal

That’s why we are seeking reforms to protect consumers; we intend to close loopholes that allowed big financial firms to trade risky financial products like credit defaults swaps and other derivatives without oversight; to identify system-wide risks that could cause a meltdown; to strengthen capital and liquidity requirements to make the system more stable; and to ensure that the failure of any large firm does not take the entire economy down with it. Never again will the American taxpayer be held hostage by a bank that is “too big to fail.”

Now, limits on the risks major financial firms can take are central to the reforms that I’ve proposed. They are central to the legislation that has passed the House under the leadership of Chairman Barney Frank, and that we’re working to pass in the

Senate under the leadership of Chairman Chris Dodd. As part of these efforts, today I’m proposing two additional reforms that I believe will strengthen the financial system while preventing future crises.

[...]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.

[...]I’m also proposing that we prevent the further consolidation of our financial system. There has long been a deposit cap in place to guard against too much risk being concentrated in a single bank. The same principle should apply to wider forms of funding employed by large financial institutions in today’s economy. The American people will not be served by a financial system that comprises just a few massive firms. That’s not good for consumers; it’s not good for the economy."

-President Obama Jan 21, 2010

The big banks it seems will no longer be able to profit via cheap funding from the Federal Reserve. Be that is may, the banks were able to make healthy profits last year, with the exception of Bank of America as it absorbed Merrill Lynch and took loan losses from credit cards and mortgages.

Goldman Sachs continues to make massive profits in its major segments of business: $8.40 per share for a total of $4.95 billion. They are broken down as follows: investment banking ($1.6b in Q409, up from $899m in Q309), trading/principal investments ($6.4b in Q409, down from $10b in Q309), and asset management ($1.6b in Q409, slightly up from $1.4b in Q309). In the first 9 months of 2009 Goldman set aside $16b for its 35,500 employees.

Morgan Stanley just recently turned around in the final 3 months of 2009 as they were late to recovery. Net income was $413m, but overall in 2009 they lost 93 cents per share on a diluted basis. They have been getting a lot of attention due to their large compensation and bonus pool which amounts to 62% of revenue. One of the best things Morgan Stanley has going for it is the absence of a big consumer-based (retail) book of business. In 2009, they set aside $14.4b for its 62,000 employees.

Bank of America lost a total of $2.2b in 2009, mostly due to retail customers' inability to pay their mortgage. Also, they charged off a large amount in order to pay back TARP. It was their first loss in 20 years (last one was during the savings and loan debacle). In the 4th quarter alone they lost $5.2b or 60 cents per share. They have set aside $10.1b to cover potential loan losses in the future, a gigantic number for such a provision.