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Dodd Throws Volcker a Bone

March 15, 2010 - by Donny Shaw

The Obama-proposed Volcker Rule, which is designed to prohibit banks from engaging in high-risk speculation that has no societal benefit, was supposed to be “dead on arrival” in the Senate. Banking Committee Chairman Sen. Christopher Dodd [D, CT], who is retiring and hopes to pass financial reform as a last boost to his legacy, saw the proposal as a poorly-timed addition to the legislation that could threaten its support from conservative, pro-Wall Street lawmakers.

But from the summary of the bill released today by Dodd, it appears to be included …just in a very watered-down, toothless iteration:

  • Volcker Rule: Requires regulators to implement regulations for banks, their affiliates and bank holding companies, to prohibit proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and to limit relationships with hedge funds and private equity funds. Nonbank financial institutions supervised by the Federal Reserve will also have restrictions on their proprietary trading and hedge fund and private equity investments. Regulations will be developed after a study by the Financial Stability Oversight Council and based on their recommendations.

So, rather than actually implementing the rules, the Dodd bill would require regulators to create and implement them at some unspecified point in the future. It’s written like this, no doubt, to help overcome opposition from Republicans. Now that the Democrats hold 59 Senate seats, not 60, they will have to win over at least one Republican to break a filibuster and get this passed.

Jon Carney at Business Insider explains why this is such a weak approach to create financial regulations:

The delay and discretion given to regulators will no doubt give the banking sector a lot of time and opportunity to exercise its influence. Any rules adopted further from the financial crisis are likely to be less restrictive on banks. As public outcry over the financial crisis fades, such rules will be subject to far less public scrutiny.

It seems inevitable that the delay in the rules will be a matter of years. The bill requires the regulations be adopted after a study by the Financial Stability Oversight Council, a body that does not yet exist and is created by the bill itself. So the council will have to be formed, officials and aides hired, and the study undertaken before any Volcker Rule is even brought up for consideration.

By then we may have another President. And hardly anyone will remember what the fuss about the Volcker Rule was all about.

Here’s a better way for advocates of the Volcker Rule to get it enacted — pass S.3098, the PROP Trading Act of 2010. This bill is esentially a stand-alone version of the Volcker Rule. It would ban federally insured commercial banks from engaging in proprietary trading for their own profit and it would bar them from owning or partnering with hedge and private equity funds. It was introduced on March 10 by Sen. Jeff Merkley [D, OR]. So far, it has attracted 5 Democratic co-sponsors.

Pic from davemee used under CC license.

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