Volcker Rule

The Volcker Rule is a proposal by and named after former Federal Reserve Chairman Paul Volcker to restrict banks from "proprietary" trading (bets made for their own account) and “sponsorship” of hedge funds and private-equity firms, if they are not done on behalf of their customers. Volcker has argued that such speculative activity played a key role in the financial crisis.

The Volcker Rule was first publicly endorsed by President Obama on January 21, 2010.

In a February 22, 2010 letter to The Wall Street Journal, five former Secretaries of the Treasury endorsed the proposed Volcker Rule.

Volker Rule in financial reform legislation
Senators Jeff Merkley, Democrat of Oregon, and Carl Levin, Democrat of Michigan, introduced the main piece of the Volcker Rule - its limitations on proprietary trading - as an amendment to the financial reform legislation that was passed by the U.S. Senate on May 20, 2010. However, despite having wide support in the Senate, the amendment was never given a vote. When the Merkley-Levin Amendment was first brought to the floor, Senator Richard Shelby, Republican of Alabama, objected to a motion to vote on the amendment. Merkley and Levin responded by attaching the amendment to another amendment to the bill put forth by Senator Sam Brownback, Republican of Kansas. Shortly before it was due to be voted upon, Brownback withdrew his own amendment, thus killing the Merkley-Levin amendment and the Volcker Rule as part of the Senate bill.

In conference committee
The House-Senate conference committee passed a strengthened Volcker rule by including the language prepared by Senators Merkley and Levin. The advantage of Merkley-Levin is that it covers more types of proprietary trading than the original rule proposed by the administration. It also bans conflict of interest trading. Senator Levin commented on the importance of that aspect: "We are also pleased that the conference report includes strong language to prevent the obscene conflicts of interest revealed in the Permanent Subcommittee on Investigations hearing with Goldman Sachs. This is an important victory for fairness for investors such as pension funds and for the integrity of the financial system. As the Goldman Sachs investigation showed, business as usual on Wall Street has for too long allowed banks to create instruments which are based on junky assets, then sell them to clients, and bet against their own clients by betting on their failure. The measure approved by the conferees ends that type of conflict which Wall Street has engaged in."

Removed by Sen. Scott Brown
However, conferees changed the proprietary trading ban to allow banks to invest in hedge funds and private equity funds at the request of Senator Scott Brown (R-Mass.), whose vote may be needed in the Senate to pass the bill. Proprietary trading in Treasurys, bonds issued by government-backed entities like Fannie Mae and Freddie Mac, as well as municipal bonds is also exempted.

External resources
The summary of the Senate bill: http://banking.senate.gov/public/_files/FinancialReformSummary231510FINAL.pdf

The full 1336-pages Senate bill: http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf

External articles

 * Louis Uchitelle, Glass-Steagall vs. the Volcker Rule, Economix, New York Times, January 22, 2010