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Geithner: We're not trying to break up the banks

January 21, 2010 |  6:29 pm

Treasury Secretary Timothy F. Geithner insists that the Obama administration doesn’t want to break up the biggest banks.

But that may depend on your interpretation of "break up."

The administration's statement on the plan says that "no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit."

That sure sounds like it would force a breakup of the megabanks, including JPMorgan Chase, Goldman Sachs, Bank of America and Citigroup, all four of which dabble in areas that would become forbidden.

Indeed, the plan sounds like a version of the repealed Glass-Steagall law -- reimposing a solid wall between traditional banking (i.e., deposit-taking and lending) and higher-risk Wall Street trading and investment activities for a bank’s own account.

In a PBS NewsHour interview tonight with Judy Woodruff, Geithner portrayed the proposals as a matter of choices for the big banks, but promised that they would be implemented in a "sensible way."

Woodruff: So in essence, are you saying big banks need to be broken up?

Geithner: No, this does not propose that. What this does is try to make sure we limit risk-taking -- the kind of risks that could threaten the stability of the system in the future.

Woodruff: I ask because banks are already saying -- and there was a CFO of Goldman Sachs who said today, this is not practical for us to separate, for example, private equity from the other work that we do. We hear other bankers saying we’re going to have to lay people off, it’s going to hurt our business.

Geithner: You’re going to hear a lot of concerns from bankers about this and, you know, we’re involved in a very important cause, which is to try to work with Congress to put in place a set of reforms that will prevent this from happening again. And that’s going to require a lot of changes.

Woodruff: Let me ask you about one particular aspect, and that is banks that would separate some of their investment operations. Does it mean, for example, that at JPMorgan – without naming a bank, that in essence, would have to spin off its investment operations?

Geithner: Banks will have some choice about how they comply with this, and it’s going to have to change, result in some changes. And we’re going to work very carefully with the Congress and the regulators to make sure we do this in a sensible way.

But again, the basic principle is that banks that have the privilege of taking advantage of the safety net [of government deposit insurance] should not use that to subsidize risky activity. I think it’s a simple principle, I think people can understand that and we’re going to do it in a careful, well-designed way.

-- Tom Petruno