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October 11, 2011

Better Markets: Strong Volcker Rule Necessary to Protect Taxpayers and Economy

Dennis Kelleher, president and CEO of Better Markets, made the following statement on today’s proposed Volcker Rule, which bans banks from trading from their own accounts rather than for their clients:

Wall Street megabanks made lots of reckless billion-dollar bets before the financial crisis in 2008.  They did that because big bets mean big bonuses.  But that gambling also meant big financial crashes and big taxpayer bailouts.  That is why the Volcker Rule is so important:  it stops Wall Street gambling, protects taxpayers, and prevents bailouts.

Before, Wall Street banks were like casinos where the lucky gamblers could make one-way bets:  if they won, they got all the money in bonuses, but if they lost they didn’t have to pay.  They got bailed out and the taxpayers were stuck with the bill. The gambling bankers got all the upside and everyone else got the downside.

Simply put, the Volcker Rule prohibits Wall Street megabanks from playing with taxpayer money.  It is meant to prevent Wall Street’s gambling and greed from wrecking our economy again.

Of course, the rule should not be so restrictive as to limit legitimate banking essential for our economy and businesses to grow.  But, the banks’ hysterical complaints about the Volcker Rule are really more often about their bonuses getting smaller than anything else.

It must also be remembered that the financial collapse those banks caused more to “reduce market liquidity, capital formation and credit availability, and thereby hampering economic growth and job creation” than any rule or reform possibly could.  Thanks to their last gambling trip, the United States is suffering from the worst economy since the Great Depression, with unemployment more than 9 percent, foreclosures at historic highs, and low to no economic growth. 

Americans need the Volcker Rule to be as strong as possible to prevent our economy from being ruined again by Wall Street bankers’ greed and recklessness.  After all, they’ve proved they can’t control themselves. 

Better Markets looks forward to reviewing and commenting on the rule proposed today, but has previously called for regulators to enact the following Volcker Rule provisions to protect the public:

*Prohibit banks from engaging in “a hide and disguise” strategy where they mask proprietary trades by arguing they are merely trading for customers. Regrettably, there have been signs that this type of evasion may be happening already.  Dodd-Frank is unambiguous, unequivocal, and has no exceptions:  banks trading for themselves where they make huge profits is prohibited.

*Impose tough penalties for any violation. Senior officers should be required to certify periodically that their bank has complied with the rule, or that is has promptly disclosed to regulators any trade that has violated the law. Regulators should create a sliding scale of penalties for violations, including fines of 10 times of the gross profit or loss from a trade, a six-month ban for the trader; and a cease-and-desist order for the firm.

*Require regulators to examine a firm’s bonus pool. Those pools show where the money is being made and lost, and by whom and from what activities.  Senior managers have such data available, and it would provide a crucial roadmap to trace proprietary trading. Regulators also should periodically test bank-trading data to determine if profit and loss margins and trading spreads exceed expected reasonable market returns.

Better Markets, Inc., is a nonpartisan, nonprofit organization that promotes the public interest in the international and domestic capital and commodity markets.

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