Obama: "We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses."
"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." The President said, "If financial firms want to trade for profit, that's something they're free to do. Indeed, doing so –- responsibly –- is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people."
25 Jan 2010
Remarks by the President on Financial Reform - Transcript
THE PRESIDENT: Good morning, everybody. I just had a very productive meeting with two members of my Economic Recovery Advisory Board: Paul Volcker, who's the former chair of the Federal Reserve Board; and Bill Donaldson, previously the head of the SEC. And I deeply appreciate the counsel of these two leaders and the board that they've offered as we have dealt with a broad array of very difficult economic challenges.
Over the past two years, more than seven million Americans have lost their jobs in the deepest recession our country has known in generations. Rarely does a day go by that I don't hear from folks who are hurting. And every day, we are working to put our economy back on track and put America back to work. But even as we dig our way out of this deep hole, it's important that we not lose sight of what led us into this mess in the first place.
This economic crisis began as a financial crisis, when banks and financial institutions took huge, reckless risks in pursuit of quick profits and massive bonuses. When the dust settled, and this binge of irresponsibility was over, several of the world's oldest and largest financial institutions had collapsed, or were on the verge of doing so. Markets plummeted, credit dried up, and jobs were vanishing by the hundreds of thousands each month. We were on the precipice of a second Great Depression.
To avoid this calamity, the American people -- who were already struggling in their own right -- were forced to rescue financial firms facing crises largely of their own creation. And that rescue, undertaken by the previous administration, was deeply offensive but it was a necessary thing to do, and it succeeded in stabilizing the financial system and helping to avert that depression.
Since that time, over the past year, my administration has recovered most of what the federal government provided to banks. And last week, I proposed a fee to be paid by the largest financial firms in order to recover every last dime. 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.
For while the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near collapse. These are rules that allowed firms to act contrary to the interests of customers; to conceal their exposure to debt through complex financial dealings; to benefit from taxpayer-insured deposits while making speculative investments; and to take on risks so vast that they posed threats to the entire system.
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.
First, we should no longer allow banks to stray too far from their central mission of serving their customers. In recent years, too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward. And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks.
Our government provides deposit insurance and other safeguards and guarantees to firms that operate banks. We do so because a stable and reliable banking system promotes sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression.
But these privileges were not created to bestow banks operating hedge funds or private equity funds with an unfair advantage. 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. And that is especially true when this kind of trading often puts banks in direct conflict with their customers' interests.
The fact is, these kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong. We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses.
It's for these reasons that I'm proposing a simple and common-sense reform, which we're calling the "Volcker Rule" -- after this tall guy behind me. 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. If financial firms want to trade for profit, that's something they're free to do. Indeed, doing so –- responsibly –- is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.
In addition, as part of our efforts to protect against future crises, 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. And through this policy, that is an outcome we will avoid.
My message to members of Congress of both parties is that we have to get this done. And my message to leaders of the financial industry is to work with us, and not against us, on needed reforms. I welcome constructive input from folks in the financial sector. But what we've seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and common-sense rules of the road that would protect our economy and the American people.
So if these folks want a fight, it's a fight I'm ready to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can't lend more to small business, they can't keep credit card rates low, they can't pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers -- that's the claims they're making. It's exactly this kind of irresponsibility that makes clear reform is necessary.
We've come through a terrible crisis. The American people have paid a very high price. We simply cannot return to business as usual. That's why we're going to ensure that Wall Street pays back the American people for the bailout. That's why we're going to rein in the excess and abuse that nearly brought down our financial system. That's why we're going to pass these reforms into law.
Thank you very much, everybody.
Over the past two years, more than seven million Americans have lost their jobs in the deepest recession our country has known in generations. Rarely does a day go by that I don't hear from folks who are hurting. And every day, we are working to put our economy back on track and put America back to work. But even as we dig our way out of this deep hole, it's important that we not lose sight of what led us into this mess in the first place.
This economic crisis began as a financial crisis, when banks and financial institutions took huge, reckless risks in pursuit of quick profits and massive bonuses. When the dust settled, and this binge of irresponsibility was over, several of the world's oldest and largest financial institutions had collapsed, or were on the verge of doing so. Markets plummeted, credit dried up, and jobs were vanishing by the hundreds of thousands each month. We were on the precipice of a second Great Depression.
To avoid this calamity, the American people -- who were already struggling in their own right -- were forced to rescue financial firms facing crises largely of their own creation. And that rescue, undertaken by the previous administration, was deeply offensive but it was a necessary thing to do, and it succeeded in stabilizing the financial system and helping to avert that depression.
Since that time, over the past year, my administration has recovered most of what the federal government provided to banks. And last week, I proposed a fee to be paid by the largest financial firms in order to recover every last dime. 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.
For while the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near collapse. These are rules that allowed firms to act contrary to the interests of customers; to conceal their exposure to debt through complex financial dealings; to benefit from taxpayer-insured deposits while making speculative investments; and to take on risks so vast that they posed threats to the entire system.
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.
First, we should no longer allow banks to stray too far from their central mission of serving their customers. In recent years, too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward. And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks.
Our government provides deposit insurance and other safeguards and guarantees to firms that operate banks. We do so because a stable and reliable banking system promotes sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression.
But these privileges were not created to bestow banks operating hedge funds or private equity funds with an unfair advantage. 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. And that is especially true when this kind of trading often puts banks in direct conflict with their customers' interests.
The fact is, these kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong. We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses.
It's for these reasons that I'm proposing a simple and common-sense reform, which we're calling the "Volcker Rule" -- after this tall guy behind me. 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. If financial firms want to trade for profit, that's something they're free to do. Indeed, doing so –- responsibly –- is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.
In addition, as part of our efforts to protect against future crises, 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. And through this policy, that is an outcome we will avoid.
My message to members of Congress of both parties is that we have to get this done. And my message to leaders of the financial industry is to work with us, and not against us, on needed reforms. I welcome constructive input from folks in the financial sector. But what we've seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and common-sense rules of the road that would protect our economy and the American people.
So if these folks want a fight, it's a fight I'm ready to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can't lend more to small business, they can't keep credit card rates low, they can't pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers -- that's the claims they're making. It's exactly this kind of irresponsibility that makes clear reform is necessary.
We've come through a terrible crisis. The American people have paid a very high price. We simply cannot return to business as usual. That's why we're going to ensure that Wall Street pays back the American people for the bailout. That's why we're going to rein in the excess and abuse that nearly brought down our financial system. That's why we're going to pass these reforms into law.
Thank you very much, everybody.
Investment Team Launches Range of Hedge Funds in London & Hong Kong
HedgeCo: Hedge Fund Launch News - A team led by investment management specialists, Anders Jacobsen and Paul Thompson have launched Galileo Capital Management, a global hedge fund investment management and advisory firm with operations in London and Hong Kong.
Galileo Capital Management will launch, manage and raise capital for a range of alternative asset funds. These planned funds target very under-invested business sectors or are highly innovative improvements of existing investment strategies. Offering a low correlation to traditional investments, the firm will also provide advice on business entry strategies into China, including sourcing suitable business partners and execution.
“The future of Galileo will witness niche positioning and effective maximization of opportunity in markets that are quite unexplored to date. Anders Jacobsen, co-founder and Principal, said, "Our strategy will pick up in areas which the market has traditionally dropped off its radar screen.”
“The recent financial crisis has underlined the importance of China and more broadly of Asia as a source of growth and key determinant in the global economy." Paul Thompson said, "Our experience and high-level network in China gives clients access to this region in a high-quality manner through our business entry and advisory services."
Founders Jacobsen and Thompson have over 40 years combined experience in the investment management sector with distinguished track records in global investment managers including Goldman Sachs, Prudential Financial, Inc., Bankers Trust and Chase Manhattan Bank. Between them they have advised numerous mutual, private equity, venture capital and hedge funds on their establishment and launch, as well as provided growth and development strategies for existing investment funds.
Galileo Capital Management will launch, manage and raise capital for a range of alternative asset funds. These planned funds target very under-invested business sectors or are highly innovative improvements of existing investment strategies. Offering a low correlation to traditional investments, the firm will also provide advice on business entry strategies into China, including sourcing suitable business partners and execution.
“The future of Galileo will witness niche positioning and effective maximization of opportunity in markets that are quite unexplored to date. Anders Jacobsen, co-founder and Principal, said, "Our strategy will pick up in areas which the market has traditionally dropped off its radar screen.”
“The recent financial crisis has underlined the importance of China and more broadly of Asia as a source of growth and key determinant in the global economy." Paul Thompson said, "Our experience and high-level network in China gives clients access to this region in a high-quality manner through our business entry and advisory services."
Founders Jacobsen and Thompson have over 40 years combined experience in the investment management sector with distinguished track records in global investment managers including Goldman Sachs, Prudential Financial, Inc., Bankers Trust and Chase Manhattan Bank. Between them they have advised numerous mutual, private equity, venture capital and hedge funds on their establishment and launch, as well as provided growth and development strategies for existing investment funds.
Investor Commitment to Hedge Funds Comes With Rising Expectations - Report
HedgeCo Whitepaper Reviews - A new white paper published by the SEI Knowledge Partnership in collaboration with Greenwich Associates, reports that transparency and liquidity risk have surpassed poor performance as the top concerns for institutional investors investing in hedge funds.
The 17-page report, entitled "The Era of the Investor: New Rules of Institutional Hedge Fund Investing," points to a need for hedge fund managers to institutionalise responses to transparency demands and to demonstrate clear sources of alpha to retain and gain assets among an increasingly demanding institutional investor base.
The survey revealed a continued commitment to hedge fund investing among institutions as nearly 80 percent of all survey respondents said they have no plans to change their hedge fund allocations in the next 12 months, while 15 percent expect to increase their allocations.
What will change is their demand for transparency. Over 70 percent of respondents reported requesting more detailed information from managers than they did a year ago.
While the type of information sought ranged from counterparty and leverage exposure data to sector and position-level detail, over 80 percent of the respondents reported a focus on funds' valuation methodologies. Investors also continue to exert influence on fee structures, as nearly one in five respondents reported negotiating fee arrangements different than the standard "2 and 20" for single-manager funds and "1 and 10" for funds of hedge funds over the last year.
"Investors remain committed to hedge funds but that commitment comes with increased expectations," said Phil Masterson, Managing Director for SEI's Investment Manager Services division. "The balance of power has clearly shifted and managers must meet the growing demand for transparency and increase their focus on operational effectiveness if they want to be successful in this 'Era of the Investor.'"
With respect to manager selection, institutional investors are even more focused on a manager's ability to identify and clearly explain the alpha source from which the performance is derived. Another critical factor in manager selection was compliance infrastructure, with nearly 50 percent of respondents citing it as "very important." Independent administration and a separation of investment management and operations management roles were also identified as high-ranking factors in manager selection.
For hedge fund managers, the survey clearly points to the need to focus on the fundamentals as they face greater scrutiny and demands from investors. The survey reveals that investors are concerned with issues such as liquidity risk, valuation methodology, and whether performance characteristics are in line with stated strategies. It also points to institutional investors' willingness to look beyond short-term performance and focus on other traditional indicators of quality, such as a firm's management team, investment process, and operations and compliance infrastructure.
For fund managers to remain competitive, the survey emphasised the need for firms to proactively enhance their transparency and investor communications and reporting. Fund managers also have an opportunity to add value by helping educate the investment committees and boards of institutional investors, given that investors cited that as their second greatest challenge.
The 17-page report, entitled "The Era of the Investor: New Rules of Institutional Hedge Fund Investing," points to a need for hedge fund managers to institutionalise responses to transparency demands and to demonstrate clear sources of alpha to retain and gain assets among an increasingly demanding institutional investor base.
The survey revealed a continued commitment to hedge fund investing among institutions as nearly 80 percent of all survey respondents said they have no plans to change their hedge fund allocations in the next 12 months, while 15 percent expect to increase their allocations.
What will change is their demand for transparency. Over 70 percent of respondents reported requesting more detailed information from managers than they did a year ago.
While the type of information sought ranged from counterparty and leverage exposure data to sector and position-level detail, over 80 percent of the respondents reported a focus on funds' valuation methodologies. Investors also continue to exert influence on fee structures, as nearly one in five respondents reported negotiating fee arrangements different than the standard "2 and 20" for single-manager funds and "1 and 10" for funds of hedge funds over the last year.
"Investors remain committed to hedge funds but that commitment comes with increased expectations," said Phil Masterson, Managing Director for SEI's Investment Manager Services division. "The balance of power has clearly shifted and managers must meet the growing demand for transparency and increase their focus on operational effectiveness if they want to be successful in this 'Era of the Investor.'"
With respect to manager selection, institutional investors are even more focused on a manager's ability to identify and clearly explain the alpha source from which the performance is derived. Another critical factor in manager selection was compliance infrastructure, with nearly 50 percent of respondents citing it as "very important." Independent administration and a separation of investment management and operations management roles were also identified as high-ranking factors in manager selection.
For hedge fund managers, the survey clearly points to the need to focus on the fundamentals as they face greater scrutiny and demands from investors. The survey reveals that investors are concerned with issues such as liquidity risk, valuation methodology, and whether performance characteristics are in line with stated strategies. It also points to institutional investors' willingness to look beyond short-term performance and focus on other traditional indicators of quality, such as a firm's management team, investment process, and operations and compliance infrastructure.
For fund managers to remain competitive, the survey emphasised the need for firms to proactively enhance their transparency and investor communications and reporting. Fund managers also have an opportunity to add value by helping educate the investment committees and boards of institutional investors, given that investors cited that as their second greatest challenge.
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