The cynics called it a stunt, a photo-op and dead on arrival.
But when Senate Banking Committee Chairman Chris Dodd (D-Conn.) unveiled his Wall Street reform proposal Monday, there it was: the much-maligned “Volcker rule.”
Dodd’s decision to include the provision in his surprisingly tough reform bill meant two things: The Treasury Department had more sway than anyone expected on the Dodd proposal, and much of the financial punditocracy was just dead wrong about “dead on arrival.”
The rule — which is named after former Fed Chairman Paul Volcker, a White House economic adviser who persuaded President Barack Obama to propose it earlier this year — would require regulators to prohibit so-called proprietary trading by deposit-taking banks. That is the process whereby banks trade their own money in the markets, rather than client money; it has been accused of opening up opportunities for excessive risk taking and conflicts of interest.
Dodd’s proposal will also prevent banks from investing in or owning hedge funds and private equity funds. The measure calls for a study by a new Financial Stability Oversight Council to figure out how best to implement the new regulations.
According to a senior administration official, Dodd decided to include the Volcker provisions in the measure only this past weekend.
“I’ll paraphrase Mark Twain,” said the gleeful official Monday. “The rumors of its demise were premature.”
The official said that Treasury Secretary Timothy Geithner and other top aides never gave up on the idea, and pushed it in dozens of meetings with Dodd and other members of the Senate Banking Committee. Geithner himself met with eight senators in sessions during the month of March.
“Part of the reason people called it DOA is that they didn’t understand the dynamics of the committee,” the official said. “This wasn’t just plopped out of the sky. They understood it was important for us to get it into the bill.”
But the reason the measure’s fate changed was as much politics as substance. Once Dodd decided to shut down negotiations with Tennessee Sen. Bob Corker, he became much less likely to get any Republican votes, and so he needed to court Democrats. The Volcker rule is expected to help secure the support of Oregon Sen. Jeff Merkley, for example. Merkley released a positive statement Monday, calling the proposal “a significant stride towards a stronger financial system.”
The overall result of the last-minute changes is a bill that was much tougher than many on Wall Street had expected. “There hasn’t been financial reform on the scale I am proposing this afternoon since the 1930s,” Dodd said.
And that could be one reason why the White House embraced the proposal less than an hour after it was unveiled.
“This proposal provides a strong foundation to build a safer financial system,” Obama said in a statement. “As the bill moves forward, I will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill and will fight against efforts to weaken it.”
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