Amendment from Merkley and Levin to Crack Down on High-Risk Proprietary Trading

Senators Introduce Amendment Also Aimed at Eliminating Conflicts of Interest Like Those in Goldman Sachs Case

Monday, May 10, 2010

WASHINGTON U.S. Sens. Jeff Merkley, D-Ore., and Carl Levin, D-Mich., are introducing an amendment today [PDF] to the Wall Street Reform Bill that will get high-risk proprietary trading out of the nations banks and ensure that other financial companies trading doesnt endanger the banking system. The amendment will help end conflicts of interest like those revealed at Goldman Sachs, focus banks on their primary mission of lending to businesses and individuals, and ensure that taxpayers are never again forced to bail out Wall Streets sour bets.

“It is unacceptable to continue allowing Wall Street to put their short-term gambles ahead of the long-term prosperity of Main Street America,” Merkley said. “In the last few years we’ve seen high-risk trading result in massive taxpayer bailouts for big banks. And in the last few days, we’ve seen how proprietary trading can cause conflicts of interest when firms bet against securities they help put together for their clients. If a firm wants to spin the roulette wheel on risky bonds and securities, we aren’t going to stop them. But they need to take it outside the banking system that millions of American families and small businesses depend on.”

“Most Americans can’t understand how these financial institutions can make multi-billion dollar bets against securities they sell to their customers and pocket the winnings when those bets succeed, and then have taxpayers bailing them out when the bets fail,” said Levin. “This legislation addresses the conflicts of interest that have marked too many Wall Street transactions. Maybe we can’t stop the extreme greed that lies behind these conflicts, but we can act to end the conflicts which have allowed big payoffs.”

The legislation is similar to the “Volcker Rule” proposed by former Federal Reserve Chairman Paul Volcker. Of the Merkley-Levin amendment, Volcker said in a statement today, he was “very encouraged by the efforts of Senators Merkley and Levin to clarify and enhance the proprietary trading restrictions contained within the Dodd Bill." The amendment is also supported by Banking, Housing and Urban Affairs Chairman Chris Dodd, D-Conn., and the Department of Treasury.

The Merkley-Levin amendment would restrict proprietary trading at banks and other large, important financial institutions. By keeping our banks and other large, complex financial institutions away from these risky activities, the bill will help protect the taxpayer from bailouts and the damage to the economy that comes from the failure of critical financial institutions. At the same time, the bill leaves plenty of space for smaller firms to do speculative trading, but outside of taxpayer-supported commercial banks. Specifically, the bill:

  • Bars banks, bank holding companies, and their affiliates and subsidiaries from engaging in high risk speculation involving any stock, bond, option, commodity, derivative, or other security or financial instrument.  Also bars those entities from investing in or sponsoring a hedge fund or private equity fund.
  • Requires massive, systemically-critical nonbank financial institutions (i.e., giant Wall Street investment houses whose failure will damage the banking system and access to credit) to set aside additional capital to decrease the risk posed by speculative trading.  
  • Prohibits conflicts of interest such as we saw when Goldman Sachs bet against the packages of securities they assembled and sold to their clients. 

The amendment is cosponsored by Sens. Sherrod Brown, D-Ohio, Ted Kaufman, D-Del., Jeanne Shaheen, D-N.H., Dianne Feinstein, D-Calif., Bob Casey, D-Pa., Bill Nelson, D-Fla., Roland Burris, D-Ill., Mark Begich, D-Alaska, Daniel Inouye, D-Hawaii, Sheldon Whitehouse, D-Conn., Claire McCaskill, D-Mo., Mark Udall, D-Colo., Barbara Mikulski, D-Md., Bernie Sanders, I-Vt., and Tom Udall, D-N.M.

This legislation has been endorsed by John Reed, the former Chair and CEO of Citibank, Bill; leading economists Robert Reich, and Robert Johnson, Director of Economic Policy for the Roosevelt Institute; and major organizations calling for real Wall Street reform, including Americans for Financial Reform, the Independent Community Bankers of America, the AFL-CIO, Main Street, Alliance, A New Way Forward, Bold Nebraska, California Reinvestment Coalition, Campaign for America's Future, Center for Media and Democracy, Consumer Watchdog, Consumers Union, Demos, International Brotherhood of Teamsters, Jobs with Justice, National People’s Action, Neighborhood Economic Development Advocacy Project (NEDAP-NY), Public Citizen, Service Employees International Union (SEIU), U.S. Public Interest Research Group (PIRG) and Union Plus.

Read Levin's floor statement on the amendment here.

The text of the amendment is available here.

A fact sheet about the amendment is available here.