In it, but not of it. TPM DC

One Last Chance To Get Wall Street Reform Right

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Merkley, along with Sen. Carl Levin (D-MI), were the primary authors of the so-called Volcker Rule, meant to forbid federally insured banks from speculating with depositor money. But the regulators tasked with writing and implementing the rule, under pressure from the financial services industry, wrote exemptions into the draft that, if finalized, would allow firms to continue making the risky trades that got JP Morgan into trouble.

Between now and July, those regulators can close those loopholes -- and they'll be under intense pressure from members of Congress to do so.

"What's very helpful is that this has happened before the rules are final. Because it gives a chance for regulators to say, 'Oh, we are not going to let the rules go through with all the loopholes that we've stuck in for banks over the last two years,'" Merkley said. "One of these is portfolio hedging. The Volcker Rule statute that Carl and I wrote is very clear that you can only hedge specific risks, so you have a limited exposure due to a small portfolio that's legitimate under market making that involves, say, oil, and you'll be affected badly if the price of oil [rises], so you can do a proportional, specific hedge for the price of oil."

The JP Morgan debacle has reignited efforts both on and off Capitol Hill to impose blunter rules on Wall Street. During the Wall Street reform legislative process, efforts to reimpose so-called Glass-Steagall restrictions on banks and bank holding companies owning investment shops, to cap the size of banks, or to break them up all failed.

Merkley thinks the Volcker Rule, if properly implemented, accomplishes the most important goal underlying all of these measures, and doubts any effort, other than to strengthen the Volcker Rule, will succeed.

"[E]ssentially the Volcker Rule is the Glass-Steagall firewall," Merkley explained. "It is the most important firewall between hedge funds."

Merkley went on:

If you want to take it past the Volcker Rule you need to ask the question, Should we take the banks out of the market making business? Should we eliminate their ability to do any risk mitigation at all, so that it's cleaner but they don't have the ability to set off risk? Should we get them out of the wealth management business? It was the judgment that Carl and I had during this process is that the one that posed the risk to banks was the hedge funds and that that's what we were going to get out. I don't think there is a political path, when I look at the House, when I look at the Senate, I don't think there's a political path to separate the banks from these other three categories, because they really don't pose substantial risk.

That'll disappoint Wall Street reformers like Massachusetts Senate candidate Elizabeth Warren, and myriad outside advocates. But if they can bring enough public pressure to bear on Congress to force a new legislative process, Merkley will in some cases be on their side.

"My focus is all on making this firewall work," he said. "This is kind of the bird in the hand. We've got to make the most of it, but if the regulators punch holes in it, we've lost. ... I did support the bill [by Sens. Sherrod Brown (D-OH) and Ted Kaufman (D-DE)] to make banks smaller. But we're not -- because we're not in the middle of Dodd-Frank -- there's no path to that at this moment."