Debating Financial Services Reform

WASHINGTON, D.C. - The U.S. Senate Banking, Housing and Urban Affairs Committee Tuesday aired President Barack Obama's proposal to broaden financial services reform measures before Congress to include restrictions on the trading practices and market share of commercial and investment banks.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., opened the hearing saying that the financial meltdown "nearly toppled the American economy" which has lost more than 7 million jobs. "Billions of dollars in wealth and GDP are gone," he said, adding that such a crisis "can't happen again."

White House Economic Advisor Paul Volcker, also a former Federal Reserve chairman, testified before the Senate Banking pushing for prohibitions that would stop commercial banks, that both hold insured deposits and conduct investment activities, from engaging in high-risk trades.

"It's a question of what risks are going to be protected by the federal government," Volcker said, adding that the government and taxpayers do not have to shoulder risks that should be borne by shareholders.

“Hedge funds, private equity funds and trading activities unrelated to customer needs, unrelated to continuing banking relationships, should stand on their own, without the subsidies implied by public support for depository institutions,” he said.

President Obama surprised the banking industry when he signed on to Volcker's stance. Ranking Committee member Sen. Richard Shelby, R-Ala., said the crackdowns on speculative trading were "air-dropped" into the overall negotiations on financial overhaul that have been going on for months.

Shelby said the goal of final legislation should be to eliminate taxpayer exposure to private risk.

The American Bankers Association has come out in favor of establishing a systemic risk regulator that would not be involved in day-to-day operations and creating a mechanism to systemically unwind too-big-to-fail institutions, while keeping a narrow range of circumstances that would trigger government intervention.

Dodd said critics of reform proposals say the limits would not have prevented the crisis that took down Lehman Brothers. Volcker agreed but said stricter regulations would prevent future calamities.

Deputy Treasury Secretary Neal Wolin, who also testified Tuesday, supported a universal ban on all banks - not just commercial institutions - that would prevent using separate trading desks to speculate on commodities such as oil or certain securities.

President Obama's policy approach would "lay the foundation for a more stable financial system," Wolin said.

Regulatory changes discussed Tuesday were not a part of sweeping legislation passed by the U.S. House of Representatives in December. The Senate has yet to coalesce around a bill that would have to be reconciled with the House version before advancing to the President for signature into law, Dodd said.

Another hearing will convene Thursday with testimony from industry players and folks in academia, Dodd said.

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