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More by Heather C. McGhee

Coalition of the Unwilling

American Prospect | April 26, 2010

March 11, 2010

PROP Trading ACT: Crucial Reform Limits Bank Risk-Taking, Will Help Restore Stability and Accountability to Our Financial System

Washington--Under a bill introduced in the Senate yesterday, The PROP Trading ACT, bank holding companies that benefit from federal deposit insurance and access to the Federal Reserve discount window would be banned from making speculative investments in stocks and derivatives for their own accounts. They would also be prohibited from owning hedge funds or private-equity firms, among other critical changes. The five Democratic senators who backed this bill include Senator Merkley, a key advocate of financial industry reform on the Senate Banking Committee, and has the support of Senator Levin, Senator Kaufman, Senator Sherrod Brown, and Senator Jeanne Shaheen. In response, Heather C. McGhee, Washington Director Demos, issued the following statement:

"The PROP Trading Act is a prudent reform aimed at protecting the banking institutions American families and businesses rely on from the inherently volatile activity of Wall Street. Like the Administration's Volcker Rule, the bill will prevent companies that own banks from owning hedge funds or putting their capital at risk in securities for their own accounts--except for limited circumstances.

"The American public has paid dearly for an experiment in radical deregulation over the past 20 years. They have paid for it as consumers, through higher rates and fees and less consumer choice. They have paid for it as investors, as conflicts-of-interests and reckless bets have enriched trading firms but not clients. They have paid for it as taxpayers, through over $14 trillion in bailouts and other subsidies following the crisis. Finally, they have paid for it as homeowners, workers and families who have lots their homes, jobs, and retirement savings in the worst financial crisis since the Great Depression. Including the PROP Trading Act as part of comprehensive financial regulatory reform will help restore stability and accountability to our financial system."

In a January 2010 Demos report, Bigger Banks, Riskier Banks: The Post-Bailout Continuation of a Pre-Bailout Trend" co-authors Nomi Prins and James Lardner examined the recent activities of the top six bank holding companies--Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley.

All of these institutions (among the biggest recipients of federal bailout and subsidization money) did better in 2009 than they had in 2008. But, as the Demos report found, it is higher trading revenues through riskier investing and speculation, not ordinary banking activity such as lending, that account for the improvement in one case after another. These are the types of activity that lead to financial industry instability, and which the the PROP Trading ACT would seek to curtail.

TEXT OF THE PROP TRADING ACT:

 

 

PROP Trading Act