As the conference committee reconciling the House and Senate versions of financial regulatory reform went through its marathon 20 hour negotiating session on Thursday night, an exception to the Volcker rule — which prevents banks from trading for their own benefit with federally insured dollars — was added at the behest of Sen. Scott Brown (R-MA). The exception, which was pushed by large Massachusetts-based financial firms State Street Corp. and Mass Mutual, allows banks to invest up to three percent of their capital in risky hedge funds and private equity firms and to continue managing those funds.
These exemptions could undermine the effectiveness of the rule, as State Street is a great example of a financial firm that specialized in relatively benign financial practices, but then became systemically important by building up a huge amount of credit risk and engaging in risky trading. Ultimately, it needed to be rescued by federal intervention.
Of course, when he was first elected, Brown said that there would be “no more closed-door meetings or back-room deals by an out-of-touch party leadership.” And now, Brown isn’t even certain that he will vote for the reform bill because of a tiny bank tax levied to cover the cost of the law’s implementation:
On Friday, Brown questioned a provision added to the bill late in negotiations that would charge large banks and hedge funds a fee to generate as much as $19 billion to help cover the cost of the bill. “My fear is that these costs would be passed onto consumers in the form of higher bank, ATM and credit card fees and put a strain on lending at the worst possible time for our economy,” he said in a press release. “I’ve said repeatedly that I cannot support any bill that raises taxes.”
First, it’s worth putting this bank levy in perspective. As Dean Baker, co-director of the Center for Economic and Policy Research, pointed out, “the fee is approximately equal to 0.01 percent of projected GDP over the next decade. If it is fully passed on by financial institutions to customers will cost people an average of $6 a year.”
But more importantly, Brown’s deal strikes at the very heart of the Volcker rule. As former Federal Reserve Chairman and Obama administration adviser Paul Volcker said, “allowing a bank to invest in a speculative fund goes against the very intent of the bill as we seek to define those activities that are worthy of government protection.”
The vote count on financial regulatory reform is complicated by the passing of Sen. Robert Byrd (D-WV), who was a supporter of the effort, making Brown’s vote even more important. Brown was one of four Republicans who voted for the original Senate bill, and the other three — Sens. Olympia Snowe (R-ME), Susan Collins (R-ME) and Chuck Grassley (R-IA) — have thus far been noncommittal as to the reconciled bill.