Obama’s Bank Plan Raises TOB Fears

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WASHINGTON — Market participants worried yesterday that the Obama administration’s plan to limit the size and certain trading activities of banks could adversely affect firms’ tender option bond programs, which provide money market funds with safe municipal investments.

They also expressed concern that the plan, which includes the elimination of bank proprietary trading, could remove an important but opportunistic buyer of large bond deals that have lower ratings and higher yields. Specifically, proprietary desks have “played an important role” in supporting the transportation and health care sectors, one market participant said.

“This may take away some of the good bids for municipals,” the source said.

In a White House speech, Obama said the proposal, which would have to be added to financial regulatory reform legislation in Congress, would reduce risk-taking and prevent another financial crisis.

Obama said his administration will fight against an army of industry lobbyists for the proposals, including one he called the “Volcker Rule,” after former Federal Reserve chairman Paul Volcker, who has been pushing American and European regulators to restrict the proprietary trading activities of commercial banks. Specifically, the president said the measure would prevent banks from owning, investing or sponsoring hedge funds, private-equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.

Obama also called for a ceiling on the market share of liabilities at the largest firms. Administration officials told reporters that this would involve expanding an existing 10% cap on the amount of federally insured deposits held by any one bank to include liabilities other than deposits.

“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,” he said.

Industry officials panned the proposal, with Tim Ryan, president of the Securities Industry and Financial Markets Association, warning against “arbitrary restrictions on growth and activities.”

Meanwhile, muni market participants said the proposal could harm to tender-option bond programs because they are often financed through bank proprietary desks. For instance, prior to their respective collapse and bankruptcies, both Bear, Stearns & Co. and Lehman Brothers TOB programs were financed through their proprietary desks, one analyst said.

While TOBs are not as big a player as they were prior to the financial crisis, when TOB issuance approached $500 billion, their disappearance “could make it harder for money market funds to find places to invest,” another source said.

Mary Jo Ochson, senior vice president and head of municipal investments at Federated Investment Management, said she is still trying to understand the specifics of the proposal, but stressed that the floating rates issued by TOB programs “are one of the highest quality obligations funds can buy.”

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