Why Put Taxpayers on the Hook by Allowing High Risk, Bonus-boosting Gambling Called “Proprietary Trading” at Wall Street’s Biggest Banks?

Want to go to Las Vegas with someone else’s credit card with no limit and you get to keep all the winnings and they pay all the losses?  Who wouldn’t want that deal!  That’s what proprietary trading is at Wall Street’s biggest taxpayer banks: they make big bets and the winnings boost their bonuses, but if they lose and fail then the taxpayers have to pay the bill.  That incentivizes a reckless, swing-for-the-fences, consequences-be-damned mentality and breeds a culture where recklessness if not illegality trumps good judgement and sensible business practices.  

That’s why the financial reform called the “Volcker Rule” in the Dodd Frank financial reform law prohibits proprietary trading.  The rule is also meant to dampen the high-risk trading culture that infected too many banks before the crash, which redirects the banks to socially useful lending to the real economy.  After all, that’s why taxpayers back banks and that’s why “[g]etting the prop trading cowboys out of taxpayer-backed banks has done more to correct the culture and refocus banks on lending to the real economy than almost anything else.”

The problem is that proprietary trading and the bonuses it produces are loved on Wall Street and that’s why killing or gutting the Volcker Rule has been a priority of Wall Street and its army of lobbyists and supporters from the beginning.  Unfortunately, it looks like those efforts are about to pay off.  While they’d love to have it completely eliminated, like many of their financial deregulation victories, they will happily take the incremental path, as the Trump administration’s deregulatory focus is now trained on the Volcker Rule.

While being referred to as “Volcker 2.0,” it should be called the “Volcker Rule Loophole.”  As proved by record-breaking revenue, profits and lending, there is no legitimate basis for reducing common sense protections for Main Street taxpayers from Wall Street recklessness.  Plus, as we’re said, now that the recovery is nine years old and that the inevitable downturn in the business cycle is coming, this is no time to be deregulating banks.  Banks need to be as strong as possible going into the down cycle or their weakness will make it worse as they pull back on lending, cover losses and generally stop supporting the jobs, small businesses and the economy generally.