On December 13, the House Financial Services Committee convened what is likely to be the last hearing of this Congressional session for the purposes of seeking “alternatives” to the Volcker Rule. The Volcker Rule, as I’ve written previously for The Nation, is a piece of Wall Street reform with a crucial purpose: to create a firewall that bars banks that enjoy FDIC insurance from risky, speculative gambling. On Wall Street, gambling with the firm’s money is known as proprietary or “prop” trading. This is an important rule to get right, and its final version has been delayed far too long. And unfortunately, the aim of this hearing was not implementing the regulation, or even about exploring alternatives to the rule but rather dragging things out to the benefit of the banks.
The hearing put on display everything we’ve come to expect from our most beholden members of Congress. Many questions had clearly been penned by bank lobbyists, and a largely hostile reception greeted the two witnesses, William Hambrecht and Dennis Kelleher, who dared to defend the reforms. But three Representatives in particular— Chairman Spencer Bachus (R-AL), Representative Shelley Moore Capito (R-WV), and Representative Jeb Hensarling (R-TX), the incoming chairman of the Committee—stood out, handing over their pulpit to a litany of misrepresentations about the effect of the rule.
Lie #1: Prop trading did not cause the crisis
In his opening statement, Chairman Bachus argued that the Volcker Rule is a “self-inflicted wound that should be repealed,” because prop trading did not cause the crisis. He’s suffering, perhaps, from a case of self-inflicted amnesia that likely came about from the $1.3 million he received from the Financial, Insurance and Real Estate sector in the 112th Congress.
Prop trading was absolutely a cause of the financial crisis. From 2002–07, when the market was going up, every bank on Wall Street accumulated absolutely massive amounts of mortgage-backed securities and CDOs. And banks were not accumulating them exclusively to sell off immediately to customers, but in many cases were holding on to them because they were, at the time, so extraordinarily profitable. It was only after the market started to realize just how toxic these investments were that they became difficult to sell. Leading up to and following the failure of Lehman, everyone was trying to sell out of their immense stockpile of these assets all at once, which caused the prices of these assets to plummet hard and fast. One of the banks worst hit by the crisis was Citigroup, who, according to their 2008 annual report, lost $20.7 billion on subprime mortgage-related holdings alone. A July 2011 report from the Government Accountability Office noted that, apart from losses due to specific subprime-related holdings, all the gains made by stand-alone prop trading desks from 2006–10 were entirely wiped out by prop trading losses.