Volcker rule ‘most important reform initiative’

WASHINGTON — As the Senate debates financial reform, consumer groups are urging Congress to break up the biggest banks and impose strict limits on proprietary lending, virtually guaranteeing a “repeat” of the 2008 meltdown if those actions aren’t taken.

The two components comprise the “Volcker rule” for financial reform, named after former Fed chairman Paul Volcker, who proposed them. President Obama has backed it, citing Volcker as a key ally.

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The prospects for its inclusion in the final bill are unclear. On Monday, dealReporter alleged that the proposal “will be either be dropped or significantly modified in the Senate” at the request of Banking Committee Chairman, Sen. Chris Dodd (D-CT). But on Tuesday, Dodd refuted the claim, telling Time Magazine he supports the Volcker rule.

Robert Weissman, president of the consumer advocacy group Public Citizen and an expert on financial market regulation, said implementing the Volcker rule is “crucial for promoting stability in the system.”

“Conceptually, what the president is proposing with regard to the Volcker rule is the most important reform initiative on the financial front,” he said in an interview with Raw Story.

“If we don’t deal with the problem of excessive size, there’s every reason to think we’re going to have a repeat of the crisis,” he said. “These too-big-to-fail institutions have structural incentives to take excessive risks, and that’s a huge problem.”

The group Americans for Financial Reform concurred, highlighting “‘Too Big to Fail’ Policy” in a post called “Preventing the Next Financial Crisis and Bailout.”

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“[R]egulatory policy should not only forbid [bank] bailouts and provide a means of resolving failed firms, but also minimize the likelihood of pressure to engage the bailouts,” the group argued. “This largely means separating risky activities from safe activities and preventing firms from becoming too large or interconnected.

AFR promoted on its Web site Volcker’s New York Times op-ed from Sunday that explained the provisions.

Banks, GOP vociferously opposed

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The details of the regulatory provisions are critical to their success, as the banking community fully intends to dodge them.

As one senior banker told the New York Times, “They can go ahead and impose the [Volcker] rule on Friday, and I can assure you that by Monday, we’ll find a way around it.” Another described it “using more four-letter words in one sentence — as nouns and verbs — than I thought possible,” reported Andrew Ross Sorkin.

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Avoiding that outcome requires the details of the restrictions to be iron-clad. According to Weissman, that means defining proprietary trading in an encompassing way that involves breaking up big banks, as opposed to simply limiting their growth henceforth.

“It does not seem that some of the details in what’s being proposed measure up to what’s necessary,” Weissman told Raw Story.

But it remains to be seen whether Democrats in Congress, facing notable opposition from the Republicans, will crack down.

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“The political problem is that concentrations of enormous economic power give rise to concentrations of enormous political power,” Weissman said. “That’s what enabled Wall Street and the big banks to spend so wildly out of control and ultimately melt down.”

Democrats are unlikely to unite their caucus, but are facing virtually unanimous opposition from Republicans, who have said the initiatives “show contempt for capitalism and continue to destroy jobs.”

Roll Call reported in December, while the House was debating its legislation, that Republicans “met with more than 100 lobbyists…to try to fight back against financial regulatory overhaul legislation.”

“The too-big-to-fail issue is crucial for promoting stability in the system, better service for consumers and preventing the political capture of the policy-making process by Wall Street.”

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While the financial reform bill passed by the House in December contains the Volcker rule provisions, they face an uphill battle in the Senate.