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Financial reform debate begins with a familiar target: Goldman Sachs

As debate begins on the financial reform bill, one of the topics was the 'proprietary trading' highlighted in the Goldman Sachs hearings this week and called unethical by many lawmakers.

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If an institution is large and "systemically important," like Goldman Sachs, it would need to set aside more capital as a cushion against the risks of its trading.

The measure also seeks to reduce conflicts of interest. "If you are designing securities and you are selling them, [you can't be] betting against them," Merkley said, adding that the Goldman hearing this week put that problem in a "spectacular spotlight."

At the hearing, Goldman executives repeatedly sought to distinguish their role as a "market maker," distributing investments to clients, from their trading activities. CEO Lloyd Blankfein and others said clients of Goldman as a market maker do not expect the firm to disclose its view of the securities' quality.

The firm also rejected the characterization that it had a massive bet that the housing market would crash in 2007, saying it had many "long" investments in mortgages that balanced against its "short" positions.

Many banks oppose a ban on proprietary trading, since trading in their own investment funds is an added profit source alongside their other activities.

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Fixing 'too big to fail'

But some finance experts say the move could fix one of the key problems that emerged in the financial crisis: Firms that were "too big to fail" (important to the system) but that took on large trading bets and thus risked failure amid the 2008 climate of panic.

Here's the interesting twist: A ban on proprietary trading is already in the bill that Sen. Christopher Dodd (D) of Connecticut has brought to the Senate floor. But the ban, dubbed the "Volcker rule" after the former Federal Reserve chairman who supports it, would be implemented only after a regulatory study period. Supporters of the ban worry this creates leeway for the curbs to be watered down or dropped.

So a fight is shaping up. Where some Republicans want to weaken Dodd's existing Volcker rule, it's possible that the Volcker rule could remain unchanged. Or it could become stronger through the Levin-Merkley amendment.

If it does, Merkley says he expects Goldman would change its current charter as a bank holding company, so that it can continue proprietary trading. But the trading would still face new rules.


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