Shelby Seeks to "End Casino Atmosphere on Wall Street”; Ban on Proprietary Trading Coming?

With thanks to Goldman Sachs, and lover letters from "Fabulous Fab", the White House is pushing ahead with a proposal to ban proprietary trading. Please consider Goldman Sachs E-mails Spur Democrats Push for Wall Street Rules

White House officials and Democratic lawmakers, bracing for a Senate showdown on Wall Street oversight, seized on internal e-mails from Goldman Sachs Group Inc. to push for new curbs that would include a ban on proprietary trading.

“These e-mails signify that there are all kinds of conflicts of interest on Wall Street, that Wall Street is working for its clients and working against its clients in the same sort of bundled toxic securities,” Senator Sherrod Brown, a Democrat from Ohio, said today on ABC’s This Week. “That’s why we need really strong reform that will separate the proprietary trading from banking functions.”

The e-mails show that the New York-based firm “made a lot of money by betting against the mortgage market,” said Carl Levin, a Michigan Democrat who leads the Senate’s Permanent Subcommittee on Investigations and published the e-mails yesterday. Democrats are using the revelations to bolster support for Senator Christopher Dodd’s financial overhaul, which faces a test vote in the Senate tomorrow. At least one Republican vote is needed to open debate.

A ban on proprietary trading, named the Volcker rule after former Federal Reserve Chairman Paul Volcker who’s advising the President Barack Obama, is “highly relevant” to ending conflicts of interest on Wall Street, Austan Goolsbee, a White House economic adviser, said today on ABC’s program “This Week.”

Shelby, also speaking on “Meet the Press”, said that while he and Dodd are “conceptually very, very close” on the legislation, he doubts they will reach an agreement by tomorrow. “We’ve got to end, once and for all, the casino atmosphere on Wall Street,” he said.

Dodd, Shelby Close to Agreement

Please consider Dodd Says He, Shelby ‘Getting There’ on a Rules Deal

“We’re conceptually very, very close,” Shelby of Alabama, the top Republican on the Senate Banking Committee, said today in an interview on NBC’s “Meet The Press.” Democrats, who control the Senate with a 59-41 majority, would need the support of at least one Republican to get the 60 votes needed to proceed.

“I hope tomorrow we can get those votes; we may not, but I hope we do because we need to move forward,” Dodd said.

If there’s no deal by tomorrow, Republicans will stand united in voting against proceeding to the Dodd proposal, Shelby said. Republicans say blocking the vote would give them leverage to force Dodd to make concessions. Democrats could use the vote to say Republicans are obstructing reform of Wall Street.

Dodd’s bill would create a council of regulators to monitor the financial system for systemic risk, create a consumer protection bureau at the Federal Reserve and create a mechanism for dissolving the biggest financial institutions when their failure would disrupt the economy.

Senator Bob Corker, a Tennessee Republican and member of the Senate Banking Committee who helped write this section of the bill, said he plans to offer an amendment to the measure that would penalize executives of the liquidated firms.

“Everything that the executive team and the board members have earned through this company over the last five years needs to be clawed back,” Corker said today in an interview on ABC’s “This Week” program. “I’m going to be doing that on the floor if it doesn’t make it into the base bill.”

Senator Sherrod Brown, an Ohio Democrat and another member of the banking panel, said he planned to offer an amendment to limit bank size.

“Too-big-to-fail means too big,” Brown said on “This Week.”

Fabulous Fab's Love Letters

Inquiring minds are reading about "Fabulous Fab's" conflicted love letters

Fabrice Tourre and his girlfriend talked like a couple very much in love. They emailed back and forth about how they wanted to curl up in each other's arms and how they looked forward to tender moments together. Tourre, a Goldman Sachs bond trader, also wrote in the emails of the impending collapse of the subprime mortgage market and how he was masterminding ways at Goldman to make money from it.

Little did they know that three years later these very personal emails written through Tourre's Goldman Sachs e-mail account would become part of one of the biggest investigations into the subsequent financial crisis.

In the email exchanges between Tourre and his girlfriend, Marine Serres, Tourre comes off as a young, hotshot trader who foresaw the subprime meltdown while still selling shoddy subprime-backed products so prolifically he could peddle them to "widows and orphans."

But Tourre -- the only individual the Securities and Exchange Commission charged in its fraud case against the firm -- also seems ethically conflicted.

"Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;) amazing how good I am in convincing myself !!!" Tourre said in an e-mail to Serres in January 2007.

"It's bizarre I have the sensation of coming each day to work and re-living the same agony - a little like a bad dream that repeats itself," Tourre writes. "In sum, I'm trading a product which a month ago was worth $100 and which today is only worth $93 and which on average is losing 25 cents a day ...That doesn't seem like a lot but when you take into account that we buy and sell these things that have nominal amounts that are worth billions, well it adds up to a lot of money."

Any Teeth or Just Talk?

A ban on proprietary trading, if there was any teeth to it, would necessitate the breakup of Goldman Sachs, Citigroup, and Morgan Stanley. However, there is no guarantee that provision makes it into the bill. Moreover, if it does make it, the provision may be so watered down with exceptions that it would be totally useless.

The council of regulators and a consumer protection bureau at the Federal Reserve is a farce. The best way to protect consumers is to get rid of the Fed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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