Making The Case For The Levin-Merkley Volcker Rule Amendment

Sens. Carl Levin (D-MI) and Jeff Merkley (D-OR)

Sens. Carl Levin (D-MI) and Jeff Merkley (D-OR)

The Senate is slowly but surely chugging its way through the huge stack of amendments to Sen. Chris Dodd’s (D-CT) financial regulatory reform bill. Yesterday, it voted down Sen. Saxby Chambliss’ (R-GA) weak alternative to the derivatives title, while approving amendments that preserve Federal Reserve oversight of small banks and crack down on deceptive lending in the mortgage business.

So far, every major amendment that would weaken the bill has been defeated. Aside from Chambliss’, Sen. John McCain’s (R-AZ) plan to abolish Fannie Mae and Freddie Mac and Sen. Richard Shelby’s (R-AL) consumer protection substitute were both rejected. But there are still a slew of amendments worth watching out for. For instance, Sen. Tom Carper’s (D-DE) amendment giving national banks immunity from state consumer protection laws would be incredibly detrimental to the bill.

An amendment put forth by Sens. Carl Levin (D-MI) and Jeff Merkley (D-OR), meanwhile, has the potential to strengthen it. It has to do with the Volcker rule, named after the former Federal Reserve Chairman, which would ban banks from engaging in proprietary trading (trading for their own benefit) with federally insured dollars.

Right now, Dodd’s bill gives regulators some discretion in implementing the rule, but Levin-Merkley would tighten the language, allowing proprietary trading “only in limited circumstances and if [the banks] set aside additional capital to cover potential losses.” Dodd has given the Levin-Merkley amendment his support.

Removing regulatory discretion when it comes to the Volcker rule is a good move. As Volcker himself said, “it’s very unlikely that the regulators and supervisors would evoke a strict prohibition until a crisis came and then it’s too late.” “Look, I’ve been a regulator for 20 years. So I know how they are,” he added.

New data released this week shows just how much of a roaring comeback proprietary trading has made. Three banks — Goldman Sachs, JP Morgan Chase, and Bank of America — made money on trading every single day of the first quarter this year. Goldman made at least $25 million each day, and pulled in more than $100 million on 35 separate days. “It’s statistically improbable to have three firms batting 1,000 and also pitching a perfect game. You wonder why the rest of America has some suspicion about proprietary trading,” said Matthew McCormick, a banking analyst.

At the same time, the latest report from the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) shows that big bank lending to small businesses fell by more than 9 percent from 2008 to 2009, even though overall bank lending only fell by 4 percent. The panel’s chair, Elizabeth Warren, called the data “infuriating.”

Banks that benefit from a federal backstop should be engaged in core banking practices — taking deposits and lending — while those that want to trade for their own benefit should shed their federal protection. But right now we’re stuck with the worst of both worlds, where lending dries up but the government is backing the banks while they trade for no benefit but their own. Levin-Merkley would rightly force the banks to go one way or the other.