May 11, 2010
Re: Oppose Brown-Hagan 3807 & Brown-Gregg 3872 / Co-Sponsor Merkley-Levin
Dear Senator:
The over 250 consumer, employee, investor, community, small business and civil rights groups who are members of Americans for Financial Reform (AFR) write to express our opposition to attempts to weaken the bill’s “Volcker Rule” limitations on risky trading in federally-supported banks. We also urge you to co-sponsor the Merkley-Levin amendment to strengthen the Volcker Rule and eliminate Goldman-style conflicts of interest.
Proprietary trading is resulting in taxpayer-supported banks using cheap federal funds to gamble, not lend to America’s struggling businesses and families. As President Obama said, “we cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses.”
That is why we urge you to oppose the following efforts to weaken the Volcker Rule:
- Brown (MA) -Hagan 3807: increases the risk of future bailouts by allowing insured depository institutions with access to the Fed discount window to own and invest in high-risk hedge funds
- Brown (MA) – Gregg 3872: opens a loophole for insured depository institutions to use “trusts” to evade the Volcker Rule.
We also urge you to support the Merkley-Levin amendment, which would:
Prohibit Goldman-Style Bets Against Clients: The amendment would prohibit securities originators from engaging in any transaction that would give rise to a material conflict of interest or undermine the value, safety, or performance of an asset-backed security during the period the security is outstanding. While Goldman Sachs has recently been charged with fraud for such a conflict of interest, there is evidence that the practice of creating toxic securities, selling them to clients and then betting against them was widespread on Wall Street. It should be banned outright.
Remove the Study Requirement and Regulatory Deference: It is Congress’ right and responsibility to make the law. The financial reform bill would only allow regulations banning proprietary trading to be developed after a study by the Financial Stability Oversight Council and based on their recommendations. By taking this approach, rather than providing statutory restrictions, any newly-imposed regulations would be subject to the whims of Administrative politics—both in the years before they go into effect, and in the years to come. The Merkley-Levin amendment makes the prohibitions statutory, and provides for a study on how best to implement them.
Close Loopholes in the Definition of Proprietary Trading: The bill takes a narrower approach to the definition of proprietary trading, exempting many types of trading including involving “market making activities” or “hedging activities,” without defining those terms. The client-centered, market-making portfolios are where many firms are actually making many of their proprietary trades. The Merkley-Levin amendment will provide a broader definition, covering trading involving any purchase or sale of a security, or transaction involving a derivative (including swaps), as a principal, for a firm’s own account. The amendment would permit federal regulators to carve out specific market making or hedging activities.
Impose Higher Capital Standards and Position Limits on Non-bank Financial Companies: Both the Merkley-Levin amendment and the bill would impose additional capital requirements and limits on systemically important non-bank financial companies. The amendment makes it explicit, however, that additional capital is required for high-risk assets and trading strategies.
For the above reasons, Americans for Financial Reform strongly endorses this amendment.
Sincerely,
Americans for Financial Reform
Our 250 member groups: http://ourfinancialsecurity.org/about/our-coalition/