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February 28, 2012

Not What Paul Volcker Had in Mind

“The Volcker rule, a crucial provision of the Dodd-Frank financial reform law, is supposed to stop banks from doing the sort of risky trading that was one of the big causes of the financial meltdown.”

“The banks hate the rule because less speculation means less profit and lower bonuses for traders and bank executives. And ever since it was signed into law in mid-2010, they have pressed Congress and regulators to weaken it. Sure enough, in late 2011, regulators issued proposed rules that are ambiguously worded and lack the teeth to rein in the banks. Paul Volcker — the former chairman of the Federal Reserve for whom the rule was named — and other reformers have rightly urged significant changes before the rule becomes final in mid-July. Regulators need to listen.”

“Here are important changes that must be included:”

“SPECIFICITY The law prohibits banks from “proprietary trading” — securities’ transactions where the profits and losses are sustained by the bank, not its customers. The sound premise is that taxpayers, who back the banks, should not be on the hook for speculation that mainly enriches traders and bank executives. So that banks can continue to serve customers, the law instructs regulators to allow certain forms of nonproprietary trading, including “market making,” in which banks can buy and sell securities, but only for the purpose of facilitating transactions for clients. The proposed regulations fail to adequately distinguish between the two types of trades. That could allow banks to engage in proprietary trades under the guise of market making.”


Read full New York Times article here.

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