Hutchison Makes One More Attempt To Weaken Volcker Rule Before Financial Reform Conference

Last week, the Senate passed Sen. Chris Dodd’s (D-CT) financial regulatory reform bill, which means that it now needs to be merged with the bill that the House of Representatives passed last year. A conference committee — which will be chaired by House Financial Services Committee Chairman Barney Frank (D-MA) — will iron out the differences between the bills and send one piece of legislation back to each chamber for a final vote, before the bill goes to the President.

Before all that, however, the Senate has one last piece of business with which to dispense. This evening, it will vote on two “motions to instruct” the conferees, which aren’t binding, but send a message as to what the majority of the body would like the conferees to fight for. And fighting for either of the motions would be problematic.

The first is comes from Sen. Sam Brownback (R-KS) and would push the conferees to exempt auto dealers from oversight by the proposed Bureau of Consumer Financial Protection. And as Tim Fernholz pointed out, the second, sponsored by Sen. Kay Bauley Hutchison (R-TX), would “weaken language that bars banks from speculating with their own capital — basically, an attack on the Volcker rule.”

Already, the ban on proprietary trading in Dodd’s bill is weak tea, giving regulators vast discretion over whether its implemented (after a study is conducted) and what activities are exempted. Hutchison’s motion (based on an amendment that she proposed) would restrict which activities could be regulated even more, by exempting many (vaguely defined) kinds of activities and an entire industry. Here’s what the amendment said:

(B) subject to such restrictions as the Federal banking agencies may determine, does not include purchasing or selling, or otherwise acquiring or disposing of, stocks, bonds, options, commodities, derivatives, or other financial instruments on behalf of a customer, as part of market making activities, or otherwise in connection with or in facilitation of customer relationships, including risk-mitigating hedging activities related to such a purchase, sale, acquisition, or disposal; and

(C) does not include the investments of a regulated insurance company, or a regulated insurance affiliate or regulated insurance subsidiary thereof

So, if the conferees actually take Hutchison’s language to heart, any activity “in facilitation of customer relationships” would be exempted. I imagine a Wall Steet firm could justify almost any activity as facilitating a customer relationship.

The C section, meanwhile, would exempt insurance companies like AIG from the rule. Considering that AIG ran a hedge fund on the side that blew up in spectacular fashion, necessitating repeated federal bailouts, this strikes me as a mistake. As Treasury Secretary Tim Geithner said, “AIG is a huge complex global insurance company attached to a very complicated investment bank hedge fund that was allowed to build up without any adult supervision.” While we should be preemptively preventing insurance companies from threatening the financial system, there’s no reason to give them a blanket exemption from the Volcker rule, discounting the possibility that one could amass systemic risk and engage in risky trading again.

Stronger Volcker rule language, proposed by Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) never came up for a vote on the floor, making it unlikely that stronger language will make its way into the final product. And Hutchison’s language would only make the watery language in the Senate bill even worse.