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Gayle in MD
03-11-2010, 06:26 AM
<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">A quintet of Democratic senators introduced legislation Wednesday to specifically prohibit investment maneuvers that have been likened to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars".

Senators Jeff Merkley (Ore.), Carl Levin (Mich.), Sherrod Brown (Ohio), Ted Kaufman (Del.) and Jeanne Shaheen (N.H.) are pushing the Obama administration's proposal to rein in banks' Wall Street-like practices, such as trading securities for their own profit, while they enjoy the protections afforded by U.S. taxpayers through deposit insurance and access to cheap funds courtesy of short-term loans from the Federal Reserve. Their legislation also attempts to sever the ties between banks and largely unregulated hedge funds and private equity funds -- firms that invest and bet for the benefit of their investors.

Those two proposals try to resurrect the wall between Main Street banking and Wall Street trading, a Depression-era reform that was torn down during the Clinton administration. After excessive risk-taking by Wall Street culminated in the worst economic crisis since the Great Depression, necessitating hundreds of billions of dollars in a taxpayer-funded bailout, top economists and Wall Street veterans have come out in favor of at least partially restoring that divide.

But it's the last two pages of the 11-page bill that gets to the heart of what's been referred to as the most egregious of Wall Street practices -- packaging and selling securities, like those backing home mortgages, to investors worldwide, and then taking contrary positions against them in case they default. Or as Financial Crisis Inquiry Commission Chairman Phil Angelides put it to Goldman Sachs chief executive Lloyd Blankfein during a public hearing in January:

"Your firm sold a significant amount of subprime mortgage-related securities. And it appears, at least according to public documents and other reports, that you may have simultaneously betted against the securities you sold to clients. According to the reports, you sold about $40 billion in 2006, 2007. In December 2006, I think, you came to the conclusion the mortgage market was heading south and you began to reduce your own positions.

And many of the securities that you sold to institutional investors, other folks went bad within months of issuance. Now, one expert in structured financing said, 'The simultaneous selling of securities to customers and shorting them because they believe they are going to default is the most cynical use of credit information that I've seen.'

Do you believe that was a proper legal, ethical practice? And would the firm continue to do that practice? Or do you believe that's the kind of practice that undermines confidence in the marketplace?"


After Blankfein explained that Goldman sells these positions to investors who want them, and then takes contrary positions to protect itself against that risk, Angelides distilled it to its most elemental form:

<span style='font-size: 20pt'>"It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."</span> </div></div>

Gayle in MD
03-11-2010, 06:30 AM
<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Merkley and Levin Introduce Legislation to Restrict Banks and the Largest Financial Institutions from Making High-Risk Bets
March 10, 2010


WASHINGTON, D.C. – United States Senators Jeff Merkley (OR), Carl Levin (MI), Ted Kaufman (DE), Sherrod Brown (OH), and Jeanne Shaheen (NH) put forward a new proposal today to help prevent taxpayer bailouts of financial firms by limiting high-risk speculation, also known as proprietary trading.

“There is a place for high-risk speculation on the prices of stocks or securities, but these bets can no longer be allowed to threaten our entire financial system,” said Merkley. “Taxpayers should never again be told that they have to save bankers from their bad bets.”
“With this bill, we attempt to rein in risky proprietary trading by firms whose failures wreak havoc on our financial markets and our taxpayers,” Levin said. “Risky trading by a handful of major firms contributed to the collapse of the some of the largest financial firms in the world, hundreds of billions of dollars in losses to taxpayers, and the devastation of the entire world economy. This legislation is aimed at preventing high-risk trading strategies adopted by a few firms from leading to another crisis.”

"Congress has to draw hard lines to deal with 'too big to fail' and prevent another financial crisis. We must restore the wall between federally insured banks and risky proprietary trading," said Kaufman.

“For years, investment banks packaged and sold toxic financial products and then used their own money to bet against these products. Banks got rich, investors got hosed, and taxpayers got stuck with the bill. It’s time for Congress to rein in Wall Street greed and end these conflicts of interest,” said Brown.

“The American people brought our economy back from the brink of a complete economic meltdown caused by the poor decisions of big Wall Street banks,” said Shaheen. “We need to protect taxpayers by making sure these Wall Street firms can’t engage in the same risky behavior.”

The Protect our Recovery through Oversight of Proprietary Trading Act (or PROP Trading Act) would restrict these trades at banks and other large, important financial institutions. By keeping our banks and other large, complex financial institutions away from these risky activities, the bill will help protect the taxpayer from bailouts and the damage to the economy that comes from the failure of critical financial institutions. At the same time, the bill leaves plenty of space for smaller firms to do speculative trading, but outside of taxpayer-supported commercial banks. Specifically, the bill:

• Bars banks, bank holding companies, and their affiliates and subsidiaries from engaging in high risk speculation involving any stock, bond, option, commodity, derivative, or other security or financial instrument. Also bars those entities from investing in or sponsoring a hedge fund or private equity fund.

• Requires large, important nonbank financial institutions to set aside additional capital to discourage them from engaging in high-risk speculation and investing or sponsoring hedge funds or private equity funds. The bill also puts strict limits on the amount of such speculation.

• Prohibits securities brokers from betting against the packages of loans (asset-backed securities) they are promoting to their clients.

The PROP Trading Act is intended to reduce high-risk speculation at our nation’s critical financial institutions, encouraging them instead to focus on lower-risk, client-oriented services.

In addition, the PROP Trading Act would address fundamental conflicts of interest associated with the sale of packages of securities made up of loans. Some financial firms put together and sold securities to their clients and then bet heavily against them. As some have noted, this is like building a car with no brakes, and then taking out life insurance on the purchasers. The PROP Trading Act would establish strong conflicts of interest protections to protect clients from these unfair and deceptive practices.

This legislation has been endorsed by business and investment leaders John Reed, the former Chair and CEO of Citibank, Bill Hambrecht, Chairman and CEO of WRHambrecht + Co, and Jeremy Grantham, Chairman of Grantham, Mayo, Van Otterloo & Co; leading academics Joseph Stiglitz, Robert Reich and Robert Johnson, Director of Economic Policy for the Roosevelt Institute; and major organizations calling for real Wall Street reform, including the Independent Community Bankers of America, Americans for Financial Reform, and the AFL-CIO.
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http://merkley.senate.gov/newsroom/press/release/?id=8E6CB736-80C6-4D18-8834-5D7D05E4501A

http://levin.senate.gov/newsroom/release.cfm?id=322957