Obama proposes bans on bank-owned private equity

The White House hopes to ‘put an end to the risky practices that contributed significantly to the financial crisis’ by forbidding commercial banks from owning private equity or hedge funds.

US President Barack Obama has proposed barring commercial banks that take deposits from customers from owning, operating or advising private equity or hedge funds as part of a broader regulation forcing commercial banks to stop taking “huge, risky bets”.

“We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidised by taxpayers and that could pose a conflict of interest,” Obama said. “And we cannot accept a system in which shareholders make money on these operations if the bank wins but tax payers foot the bill if the bank loses.”

Obama will work for the next few weeks to create a bill around the proposal to present to Congress. The bill will put in place “common sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes and ends the mentality of ‘too big to fail’”.

Obama said the federal government protects commercial banks, but the safeguards are not in place “to bestow banks operating hedge funds or private equity funds with an unfair advantage”.

The White House said Thursday’s proposal will help “put an end to the risky practices that contributed significantly to the financial crisis”.

One market source said the proposal appears to be aimed at banks, rather than the private equity industry. “It says if you're a federally-chartered institution that benefits from that status, you ought not be able to use that status to make a profit. I don't think that's coming after private equity,” the source said.

Several large banks have in-house private equity shops, including Merrill Lynch, Goldman Sachs, Credit Suisse, JPMorgan and Citi. Banks like JPMorgan, Goldman Sachs and Credit Suisse also have private equity secondaries units.

The White House said an earlier Wall Street reform bill sponsored by US Congressman Barney Frank had set up the “groundwork” for the newest proposal. Frank’s bill, “The Corporate and Financial Institution Compensation Fairness Act”, would give regulators the power to set rules prohibiting certain structures that could “threaten the safety and soundness of covered financial institutions or could have serious adverse effects on economic conditions or financial stability”.