GOP Already Using Midterms Results to Fight FinRegNovember 4, 2010 - by Donny Shaw
Incoming Financial Services Chairman Rep. Spencer Bachus [R, AL-6] is using the leverage he gained Tuesday night to try to weaken how regulators implement the already-weak derivatives reform provisions in the Dodd-Frank Act.
In a letter sent to the Financial Stability Oversight Council, Mr Bachus says that a ban on proprietary trading – known as the Volcker rule – that was included in the new Dodd-Frank financial reform law will “impose substantial costs on the American economy and market participants” with “doubtful” benefits. “Depending on how US regulators choose to implement it, the Volcker rule may spark a mass exodus of clients from US banks to banks based abroad,” he said in the letter obtained by the Financial Times. He highlighted UK-based institutions as possible beneficiaries.
Underlining the change in Congress, Mr Bachus, who as ranking Republican on the committee could replace Barney Frank as chairman of the panel, expressed concern that shareholders of Goldman Sachs and JPMorgan Chase will be hurt because the banks will be less profitable.
Bachus is way off here. The prop-trade ban wouldn’t impose any costs on financial companies. It would tamp down on banks using government guarantees to take on extra risk for the sole purpose of enhancing profit for themselves. The only way this costs banks anything would be by making less money available for CEO bonuses. Furthermore, all that financial companies would have to do to be exempt from the Volcker Rule is make sure they’re not taking an government backing from TARP, the Fed, the FDIC, etc. The real question here is, do we want to keep subsidizing CEO bonuses, or should we refocus government incentives towards more traditional banking activities like lending?
Fact is, the more traditional banks — BofA, Chase, etc — have never been involved in too much prop-trading. They’re not worried about the Volcker Rule. Goldman Sachs, on the other hand, does do a lot of prop-trading. In the case of something like Goldman where the social benefit is really hard to detect, why not just let them do what they want to do as long as they’re not being banked up by the government.
Spencer Bachus is pictured above.