A Response on Merkley-Levin

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Yesterday I highlighted an argument from the finance lawyer who writes the Economics of Contempt blog that the Merkley-Levin legislative language seeking to implement the “Volcker Rule” won’t actually work and it would be better to rely more on regulatory discretion. Merkley’s office, as you’ll imagine, isn’t buying it and they sent me a response.

I’m going to post the whole thing below the fold because the argument is somewhat technical and nature and it’s important to capture all the details. The key points, however, are that though no legislative vehicle can be 100 percent airtight, the alleged potential gaps in Merkley-Levin would exist under the un-amended language anyway, and that the “specific permitted activities” are a floor rather than a ceiling so regulators will have the ability to take additional measures if they deem them necessary.

Anyways, read the whole thing. I do tend to end up myself with the idea that the banks dont’ seem to be acting like Merkley-Levin will be easy to evade:

The Economics of Contempt argument turns reality on its head. Merkley-Levin specifically puts the provisions banning proprietary trading in law, providing additional clarity and tighter limits across the board. Are we worried that the regulators will blow a hole through it just based on their inherent interpretive power of what “market-making” means? Sure, but the argument of Economics of Contempt is that we should trust the regulators. So which one is it? Moreover, the writer’s concern of watering down the provision could happen even more easily with the underlying 619 version, where the Council is explicitly permitted not only to interpret the words of the statute but to actually modify all the prohibitions, definitions, restrictions, etc. (See section 619(g).) We don’t do that whatsoever. The ban on prohibiting proprietary is as clear a legislative intent as possible.

And as for the specific permitted activities, they are a floor, not a ceiling. That is, we permit the regulators to add additional restrictions to the permitted activities – see the beginning of subsection (d) – and direct additional capital placed against permitted activities if appropriate (subsection (d)(3)). We are as tight as it comes.

And as for offshoring, they’re factually wrong on that too. The provisions are the same as 619 as currently drafted, which was drafted by Treasury and Banking, and the only difference being ours and the underlying 619 version is that we added additional protection against offshoring. The reason the exemption is there is what’s called “international comity,” a legal concept that says that we won’t force our laws on other countries just because their firms happen to do some business the US. But we can force our laws – and do – upon US companies doing business via foreign subsidiaries. In this context, the offshore trading can occur only if it is done by a firm not directly or indirectly controlled by a US person, which includes a US bank. So it says that we’re not requiring a foreign firm to abide by our laws in their home country just because they do business in the US. It does not permit a US firm to buy a foreign firm and then move the prop trading there.

The bottom line is that Wall Street is actively mobilized against our amendment and doing everything in its power to stop it from passing because they know that Merkley-Levin will end the rackets that ran up their short-term profits and destroyed our economy.