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Obama Takes Big Swipe at Giant Banks

President Obama is taking the "too big to fail" problem head on. Shortly before noon ET, he's expected to propose new limits on the size of banks.

Details are sketchy, but the plan also could include higher capital requirements for "systemically important" financial firms; restrictions on commercial bank trading for their own accounts; restrictions on bank investment in hedge funds; and requirements that banks shore up their investment units by capitalizing them separately.

In reviving aspects of Glass-Steagall, the Depression-era law that separated commercial and investment banking until it was abolished in 1999, the proposal also could direct banks to rebuild "Chinese walls" between their traditional banking and trading divisions.

The idea is evidently to deter banks from growing large enough to pose a threat to the stability of the financial system if they run into trouble (and perhaps to dampen their political influence). Critically, the White House also seems to be targeting securities trading amid concerns that banks exploit their access to federal funds and government guarantees to engage in speculative activities, such as dealing derivatives.

As a whole, it's a historic shot across the financial industry's bow. Banks will immediately attack the proposal, which likely will require legislation, in hopes of watering it down. But this isn't health care we're talking about. There's broad popular support for policies cracking down on Wall Street, which the public has decided bears much of the blame for the financial crisis, and for curbing riskier financial practices.

Such measures can also count on bipartisan backing in Congress, with Republicans such as John McCain sponsoring legislation to break up big banks.

The financial industry also may have overplayed its hand in blanketly opposing financial reform, rather than offering compromise solutions. Within the Obama Administration, meanwhile, the proposal represents a victory for Paul Volcker and other advisers who favor more stringent restrictions on banks.

For the President, it's also an opportunity to change the headlines now that the election of Massachusetts Republican Scott Brown to the Senate threatens the Democrats' health care package.

The banking proposal, depending on its scale, could represent an important step forward in reining in Big Finance.