Merkley and Levin Introduce Legislation to Restrict Banks and the Largest Financial Institutions from Making High-Risk Bets

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.