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January 29, 2015

The watering down of Wall Street reform

When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, its intention was to create a raft of stronger financial regulations, all with the lofty aim of avoiding another painful financial crisis.
But some of those reforms may soon be weakened, thanks to a Republican-backed bill in the House that would water down some Dodd-Frank provisions. The bill would revise the so-called Volcker rule, which prohibits banks with government backing from high-risk trading and owning collateralized loan obligations, activities that were among those blamed for the financial collapse.
Collateralized loan obligations, or CLOs, may ring a bell. Structured products — such as collateralized debt obligations (CDOs) and CLOs — were the types of complex financial instruments that imploded during the financial crisis. The market for CLOs, which use leveraged bank loans as assets, has rebounded tremendously since the financial crisis, with more than $124 billion of these securities issued last year. Some of the country’s biggest banks, including JPMorgan Chase (JPM) and Wells Fargo (WFC), hold the most exposure.
“Derivatives gambling by the biggest banks on Wall Street by in large caused the last crisis and caused the need for bailouts,” Dennis Kelleher, chief executive officer of the nonprofit Better Markets, told CBS MoneyWatch. The Volcker rule “is relatively narrow because it only applies to the highest-risk activities and the most dangerous products. It’s a law that’s identifying those high-risk activities and putting protections between those and American taxpayers.”
Read the full CBS Money Watch by Aimee Picchi here.
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