'Sheriff' Obama rattles EU banks

London - Tough words and strong action by US President Barack Obama to crimp US banks provoked outspoken controversy in Europe on Friday where banking shares fell sharply.

Stock markets generally have recoiled at the tone of Obama's remarks and amid uncertainty about the implications.

Some financial sector comment said that the huge London financial market would and should copy his proposals to cut down the "plutocracy" of banking, tighten rules on trading by banks, and to separate their high-risk activities.

But others argued that Obama was shooting from the hip like a Wild West "sheriff", that his measures were driven by political opportunism, missed the causes of the crisis, could damage US financial markets and global investment.

"President Obama's announcement means the UK government will have to act to break up the banks here in Britain," commented professor Stefano Harney of the school of business management at Queen Mary University, London.

"Not to follow his lead would be to condemn the City of London to become the largest offshore banking colony in the world, with all the corruption and instability that would come with that," he said.

Analysts at CM-CIC bank in Paris commented the proposals "will cause difficulties in valuing banks and will slow down reorganisation of the sector."

Throughout 2010, regulatory issues would continue to "poison the sector," they said.

They also questioned whether proposals, being put forward by politicians "wanting to change everything in the heat of the moment for a sector in the middle of an economic crisis," were appropriate.

At brokers Aurel, analyst Christian Parisot said: "The sector could experience strong volatility because of the impossibility for analysts of working out the fundamental value of banks."

In London, the British Bankers' Association said that "we will be studying the proposals in detail to see where the US and international proposals align with what is already being discussed" in terms of reforms in Britain.

Professor Harney said that the only way to ensure that big banks created jobs and made loans was "if they are broken up and forced to make money from investment not speculation," commenting that massive bonuses by US bank Goldman Sachs "is an example of the arrogance that can lead from democracy to plutocracy."

But at currency group ECU, economist Kit Juckes commented in a blog: "Maybe in the American Wild West of the cinema, the moral of the tale would have been 'don't provoke the sheriff'."

He said: "Sheriff Obama wanted the bankers to eat humble pie, wear sackcloth and ashes and show some humility ...But when he didn't get that response, he clearly got riled and has come out looking for a fight. A modern tale - sheriff goes on shooting rampage."

Juckes argued that so-called proprietary trading, targeted by Obama, was not the cause of the crisis and was a small part of bank revenues.

"Policy-makers set interest rates far too low encouraging binge-borrowing; regulators were asleep at the wheel; bankers failed to see the dangers inherent in what they were doing; and borrowers simply borrowed too much," he argued.

He warned that Obama's proposals would reduce the capacity of banks to lend and would reduce their profitability. This would undermine the value of banking shares and meant "that the upward trend in equity indices has ground to a halt - at least for now."

Interest rates would stay low for longer and "probably send asset prices higher."

The senior strategist at BCG partners in London, Howard Wheeldon, argued that the Obama plan was "politically very adept" but that "at a stroke" Obama had chosen to "write off any resumed basis of normality" in the US banking system. This opened "a period of political acrimony that is as undesirable as it could be potentially damaging to the US."

At Citibank in London, analyst Michael Hart said that the announcement had raised aversion to risk and that in the medium term, the proposals were likely to lead to "a massive reduction in financial investment around the world and consequent capital repatriation" which could eventually support the dollar.

Some US banking institutions might hand back their banking licences, and some might divest their risky operations, thereby splintering the industry.

Fund manager Tim Roberts at Cavendish Asset Management said the announcement "goes far beyond what the markets can stomach from the volatile banking sector, and the creeping political tenor of financial debate ... Attacking the heart and soul of Wall Street is not the answer."

The causes of the crisis were long-standing and arose from easy access to capital resulting in over leveraging, he argued, referring to heavy borrowing on the basis of strongly valued assets. The answer, he argued, was to focus on restricting such gearing and this had been largely done by tightening rules on capital.

The Obama proposals would "simply damage long-term economic prospects for everyone."

- AFP