This morning President Obama announced a proposal for the financial reform of commercial banks.

The proposal is named “The Volcker Rule” after Paul Volcker, chairman of the Economic Advisory Board.  The Volcker rule addresses banks straying too far from their central mission of serving customers.  In the credit crisis it was realized banks were putting too much customer money at risk.  It would be fine for the banks to take risk, but because banks benefit from government financial privileges unique to banks such as, FDIC deposit insurance, the risk is taken on by taxpayers.

The rule states: “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 seriving their own customers.”

Proprietary trading is actively trading stocks, bonds, currencies, or commodities using the firm’s money to make a profit for itself.

Is this rule good or bad?  Hard to say.  Without proprietary trading banks like Citi would’ve recently posted losses as most of their recent profits came from trading on the market’s upswing.

Warren Buffett commented that big investment banks such as Goldman Sachs Group are likely to split off government-chartered banking operations if regulations proposed by President Obama take effect. “It would be logical that they would do so,” said Buffett.  Buffett also said he never had any problems with the old Glass-Steagall rules which largely kept commerical banks out of investment operations.

The Glass-Steagall Act was passed in 1933 by Congress.  Glass-Steagall prohibited commercial banks from collaborating with brokerage firms or participating in investment banking activities - parts of it were similar to the Volcker Rule.  In 1999, however, Glass-Steagall was repealed.

The Volcker Rule still needs to pass in Congress to become law.