Goldman Scrutiny Makes Case For ‘Volcker Rule,’ Senators Say

WASHINGTON (Dow Jones)–The intense scrutiny surrounding Goldman Sachs Group Inc.’s (GS) potential conflict of interest in packaging and selling mortgage-backed securities could give a boost to lawmakers hoping to tighten banking rules in a Senate financial-overhaul bill.

Sen. Carl Levin (D., Mich.), who chairs the panel that subjected Goldman executives to 11 hours of questioning Tuesday, wants the financial bill to bar taxpayer-insured banks and their affiliates and subsidiaries from engaging in proprietary trading of high-risk securities.

Levin and Sen. Jeff Merkley (D., Ore.) plan to offer an amendment to the financial bill separating those trading activities from banks.

Senate leaders are locked in a higher-level squabble about how the financial bill will be debated on the floor. Once that debate starts, however, the Goldman case study could cause Levin’s and Merkley’s amendment to receive a high priority, particularly because they hope to attract Republican supporters including Sens. Susan Collins (R., Maine) and John McCain (R., Ariz.).

The proposal, echoing the “Volcker Rule” named after former Federal Reserve Chairman Paul Volcker, isn’t popular on Wall Street. It was the sole provision in the financial bill with which Goldman Chief Financial Officer David Viniar took issue at Tuesday’s hearing, saying the enforced separation would harm U.S. competitiveness.

But Merkley said the amendment would put an end to the apparent conflict of interest highlighted by the Goldman case, in which investment banks create and sell asset-backed securities packages and subsequently bet against them.

“If you’re going to design securities and sell them, you cannot be engaged in activity to undermine their value,” Merkley said in an interview.

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