Reforming Wall Street Requires Tough Enforcement of New Law

Now that Congress has passed strong new Wall Street reform legislation, it is up to federal regulators to enforce the law. If they adopt weak rules, or enforce them weakly, our reforms won’t work, and the economy and taxpayers will remain vulnerable to a repeat of the Wall Street abuses and excesses that helped throw our economy into recession.

One key battle going on right now is how regulators will implement and enforce the protections against risky financial trading and conflicts of interest – protections that Sen. Jeff Merkley of Oregon and I fought to include in the Wall Street reform bill. In late October and early November, we and other Senate colleagues sent two letters to regulatory agencies, asking them to follow our intent. We did so because Wall Street, which fought so hard against passage of these protections, is now pressuring federal regulators to water them down.

Why is this so important? One of the main causes of the financial crisis was that too many banks and other financial firms made too many risky investments. When the housing market began to fall and those financial firms began losing huge amounts of money, some firms collapsed, and many others would have failed if not for the bank rescue we passed in 2008. Had we not saved them, their failures could have sparked a second Great Depression.

What troubles me and many others is that these risky bets were too often made not on the behalf of customers, but for the banks’ own accounts. Increasingly in recent years, Wall Street firms made their money not by helping clients invest wisely, but by investing for themselves – investments known as proprietary trading.

The Senate Permanent Subcommittee on Investigations, which I chair, found that firms such as Goldman Sachs weren’t just placing big bets for their profit. They were profiting at their clients’ expense. They created investment vehicles full of assets they knew were bad risks, sold them to their clients, and profited further from their customers’ misfortune by placing bets that those same investments would lose value. That was an intolerable conflict of interest.

So, Sen. Merkley and I authored legislation that limits proprietary trading and conflicts of interest, sometimes referred to as Merkley-Levin.

Under Merkley-Levin, banks whose depositors’ money is insured by the FDIC cannot, with narrow exceptions, engage in proprietary trades, so they can’t risk FDIC-insured accounts with their risky bets. Other large firms must limit how much they can risk and must keep enough money on hand to cover the risk that those bets will fail. Put simply, banks and the largest financial firms will no longer be able to rely on taxpayer bailouts to save them from their risky bets.

Also, Merkley-Levin barred financial firms from creating financial products, selling them to clients and then betting against those same products.

The goal here is simple: Avoid the dilemma we faced during this financial crisis, when we had to choose between bailing out banks that made risky bets or enduring a second Depression. And while that seems logical enough, Wall Street lobbied hard against these safeguards, and now they’re asking regulators to take it easy on them and water down these reforms. Even some of our congressional colleagues say the rules on proprietary trading should be eased because they might cut into Wall Street’s profits.

That’s exactly the wrong advice. This is no time to weaken reforms aimed at stopping Wall Street excesses. As Sen. Merkley and I wrote to the Financial Stability Oversight Council, “Financial firms must not be allowed to rely on … government support … to place bets where heads they win, tails taxpayers lose.”

Before Merkley-Levin, Wall Street was able to make risky bets, reap the profits when they paid off, and then get the taxpayers to bail them out when the bets went bad or risk triggering a depression. We can’t allow that to happen again. I’ll continue to push regulators to energetically implement the law Congress has passed to make sure it doesn’t happen again.