Chris Dodd Proposal causes Turmoil in Wall Street
It was termed as a stunt by many of the skeptics. Still, it didn’t deter Senate Banking Committee Chairman Chris Dodd release his Wall Street reform proposal on Monday and the much talked about “Volcker Rule” was there.
This rule which was included by Dodd means two things. First, the Treasury department can actually get its own in the Dodd proposal and two it’s foolish to predict financial intricacies as it might hit you back.
The rule has been named after former Fed Chairman Paul Volcker, a White House economic adviser, who actually helped President Barack Obama to propose the rule earlier this year. Now the rule states regulators to prohibit so-called proprietary trading by deposit-taking banks. What is Proprietary Trading? Well, it is the process whereby banks trade their own money in the markets, rather than client money.
This opens up opportunities for excessive risk taking and also promotes conflicts of interest. This will also prevent banks from investing in hedge funds and private equity funds. However, this rule will be studied by the Financial Stability Oversight Council and then decided when and how to implement it. According to a senior administration official, Dodd had already taken the decision to include Volcker provisions in the past week.
“I’ll paraphrase Mark Twain,” said the gleeful official. “The rumors of its demise were premature.” He adds.
He also added that Treasury Secretary Timothy Geithner and his mates were in consultation with Dodd and pushed for the idea to be implemented after several round of talks with the Senate Banking Committee. Geithner also met at least 8 officials in the month of March.
“Part of the reason people called it DOA is that they didn’t understand the dynamics of the committee,” the official said. “This wasn’t just plopped out of the sky. They understood it was important for us to get it into the bill.”
However, Politics can’t be left far behind in this issue too. Dodd was never the favorite of the Republicans and so he had to go towards the Democrats for their support. For example, Dodd got the support of Oregon Senator Jeff Merkley. The Oregon Senator himself said in a statement, calling the proposal “a significant stride towards a stronger financial system.”
Now keeping in mind the changes that the bill has seen tougher ruled for the Wall Street were on the expected lines. “There hasn’t been financial reform on the scale I am proposing this afternoon since the 1930s,” Dodd said.
Though it is tough but it has long term effects, and that’s the reason why White House has embraced the proposal.
“This proposal provides a strong foundation to build a safer financial system,” Obama said in a statement. “As the bill moves forward, I will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill and will fight against efforts to weaken it.”, he added.
The bill will be housed by the consumer financial protection agency and autonomous powers would be given to it. The bill would have the examination and enforcement power. Along with it the other powers enjoyed by the bill would be to write rules for all financial companies that deal with consumers which includes from small payday lenders to the biggest commercial banks. Other facets of the bill are streamlining bank supervision, and then it will chart more orderly lines of responsibility, finally establishing the Fed as a whole and sole supervisor over banks and thrift-holding companies with assets of more than $50 billion.
Meanwhile, Dodd outlined four major reforms in the proposal.
1) Resolution authority would allow the government to seize and wind down ailing financial institutions in a way that would not threaten the rest of the financial system.
2) The consumer agency, which Dodd said will be independent and operate with autonomy.
3) An “early warning system” in the form of a systemic risk council that would watch for threats to the financial system as a whole.
4) Transparency and accountability in derivatives and hedge funds.
“Billions of dollars were traded, or perhaps the better word is gambled, behind closed doors,” Dodd said. All this had made Corker, the Republican face on the bill, very unhappy.
“The bill Dodd has introduced has a number of policies I cannot support, but I will continue working through the amendment process in committee and on the floor to hopefully make it a bill that can receive broad bipartisan support,” Corker said in a statement.
Though, Dodd has proposed this rule but actually what passes as legislation is the big question. Brian Gardner, a banking industry analyst with Keefe, Bruyette & Woods, said Dodd’s affirmative on the Volcker rule-like provision is a negotiating tactic.
“It gives Dodd something else to negotiate away with Republicans,” Gardner said.
One thing is for sure the fight has just begun.
