LOBBYISTS ARE FRANTICALLY trying to persuade congressional negotiators to carve out more exemptions in a financial reform bill that already has been significantly weakened. As a conference committee heads toward a possible agreement this week, it needs to focus on crafting legislation that reduces systemic risk in the banking system. That means establishing clear rules without loopholes that clever lawyers will drive a truck through.
One of the essential elements of the legislation is the so-called Volcker Rule, named after former Fed Chairman Paul Volcker. The idea is simple: Banks that accept federally insured deposits would be barred from engaging in proprietary trading. Banks could not speculate for their own profit with money that is backstopped by taxpayers.
The wording of the Volcker Rule is not strong enough in either the Senate or House bills. In the Senate-passed version, regulators would establish rules limiting banks from doing proprietary trading after a study period. In the House bill, the Volcker Rule is all but nonexistent. Conference members appear set to go further than either version and would include a ban on proprietary trading without a study, but banking lobbyists are predictably pushing for exemptions. They want to allow banks to continue providing start-up capital for new hedge funds and they want up to seven years to implement any changes. But banks that want access to federally insured deposits and the cheap money at the Federal Reserve's discount window shouldn't be allowed to gamble with it.
Banking lobbyists also have their sights on an amendment in the Senate bill sponsored by Sen. Blanche Lincoln, D-Ark., that requires banks that accept federally insured deposits to spin off their lucrative derivatives trading into a separately capitalized affiliate. About 97 percent of derivatives — bets on swings in the market — are traded by the five biggest Wall Street banks, and they don't want anything to derail this gravy train. Conferees should have no sympathy. The $600 trillion market for these instruments helped accelerate the financial crisis. Once called "financial weapons of mass destruction" by the prescient Warren Buffett, derivatives should no longer be intermingled with commercial banking operations.
Another key provision that should survive in the final bill includes imposing a duty on brokers to act in the best interest of their client when offering investment advice. How is this not already the law?
On Tuesday, conferees allowed an exemption for auto dealers from a new consumer financial protection regulator. That is not in the public interest, and there is no justification for giving the auto dealers a pass.
Congressional negotiators have a choice as they hammer out the final details on much-needed financial reform. They can stand for financial reform with real teeth and stand up to the pressure of the banking lobbyists. Or they can bow to those deep-pocket financial interests that have sponsored more than 800 fundraisers over the past year for members of the congressional banking committees. A weak reform bill that offers too little oversight and too many loopholes would not be in the nation's best interest.