The Dodd-Frank act restrictions on proprietary trading and conflicts of interest: New tools to address evolving threats

Harvard Journal on Legislation

Volumn 48, Issue 2, 2011, Pages 515-553

  Merkley, Senator Jeff ^a   Levin, Senator CFarl ^b  

^a PRINCETON UNIVERSITY   (United States)

^b HARVARD LAW SCHOOL   (United States)

Author keywords

[No Author keywords available]

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EID: 84858791006     PISSN: 0017808X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (400)

1. Unless otherwise indicated, for the purposes of this Policy Essay, the term "proprietary trading" means the purchase or sale of financial instruments for the firm's own account, including investments in separate private funds managed or sponsored by the firm.
2. Press Release, Dep't of the Treasury, Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association by Alan B. Krueger, Assistant Sec'y for Econ. Policy & Chief Economist (May 3, 2010), available at http://www.treasury.gov/press-center/press-releases/Pages/tg683.aspx
3. see, e.g., Jeffrey E. Garten, The Big Bang of Bailouts, NEWSWEEK (Dec. 13, 2008), http://www.newsweek.com/2008/12/12/the-big-bang-of-bailouts.html
4. Bob Ivry, Taxpayer Pledges Fall to $8.2 Trillion in U.S. Bailout, BLOOMBERG (Dec. 23, 2009), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=A7484bxHz7Bk.
5. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010)
6. The Authors introduced their initial legislative proposal on March 10, 2010. Protect Our Recovery Through Oversight of Proprietary Trading Act of 2010 (PROP Trading Act), S. 3098, 111th Cong. (2010). The original language was then modified during the Senate floor debate on financial regulatory reform, see infra Part III, and was ultimately included in the final reform package, Dodd-Frank Act §§ 619-21, 124 Stat. at 1620-32 (to be codified in scattered sections of 12, 15 U.S.C.).
7. Banking Act of 1933 (Glass-Steagall Act), Pub. L. No. 73-66, 48 Stat. 162 (codified as amended in scattered sections of 12 U.S.C. (2006)).
8. Securities Act of 1933, Pub. L. No. 73-22, 48 Stat. 74 (codified as amended in scattered sections of 15 U.S.C. (2006)).
9. Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 881 (codified as amended in scattered sections of 15 U.S.C. (2006)).
10. Glass-Steagall Act sec. 8, § 12B, 48 Stat. at 168-90 (codified as amended at 12 U.S.C. § 1811 (Supp. II 2008)) (amending Federal Reserve Act of 1913).
11. In this Policy Essay, "commercial banking" refers to the business of taking deposits and extending credit.
12. In this Policy Essay, "investment banking" refers to securities underwriting, dealing, advising, and related activities
13. Glass-Steagall Act §§ 16, 20, 21, 32, 48 Stat. at 184-85, 188-89, 194 (codified as amended at 12 U.S.C. §§ 24, 377, 378, 78 (Supp. II 2008)).
14. Thomas A. Brooks, The Federal Deposit Insurance System: The Past and the Potential for the Future, 5 ANN. REV. OF BANKING L. 111, 111-12 (1986).
15. Member banks of the [Federal Reserve] system have manipulated their deposit accounts... releasing enormous funds of the banks to be thrown into the maelstrom of stock speculation I have often pointed to the absurdity of States and communities and the Nation enacting laws making it a criminal offense for a company of gentlemen to sit around a table and wager at poker, or to go to a race track and bet on a race, and then legalizing a system of pure gambling that menaces the entire commercial and financial fabric of the Nation.
16. CONG. REC. 3206-07 (1929) (statement of Sen. Glass).
17. see also JOHN KENNETH GALBRAITH, THE GREAT CRASH: 1929 43-65, 100-15, 147-54 (Mariner Books 2009) (1954).
18. See GALBRAITH supra note 13, at 43-65.
19. Steven L. Schwarcz, Systemic Risk, 97 GEO. L.J. 193, 199-200 (2008)
20. see also Simon Johnson & James Kwak, 13 Bankers: The Wall Street Takeover And The Next Financial Meltdown 31 (2010).
21. Michael P. Malloy, Banking Law and Regulation § 4A.10 (2011).
22. Securities Act of 1933, Pub. L. No. 73-22, 48 Stat. 74 (codified as amended in scattered sections of 15 U.S.C. (2006)).
23. Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 881 (codified as amended in scattered sections of 15 U.S.C. (2006)).
24. James Lardner, A Brief History of the Glass-Steagall Act, DEMOS (Nov. 10, 2009), http://www.demos.org/pubs/glass-steagall-edit.pdf. For example, money market mutual funds.
25. See Samuel G. Hanson, Anil K. Kashyap & Jeremy C. Stein, A Macroprudential Approach to Financial Regulation, J. OF ECON. PERSPEC- TIVES, Winter 2011, at 3, 13-16
26. Morgan Ricks, Shadow Banking and Financial Regulation 3 (Columbia Univ. Center for Law & Econ. Studies Research Paper Series, Working Paper No. 370), available at http://ssrn.com/abstract=1571290 (defining shadow banking as the "set of institutions [that] emerged that performed the basic functions of depository banks, but without submitting to [traditional banking regulation]").
27. See Arthur E. Wilmarth, Jr., The Transformation of the U.S. Financial Services Industry, 1975-2000: Competition, Consolidation, and Increased Risks, 2002 U. ILL. L. REV. 215
28. see also Century of Change, FED. RES. BANK OF MINNEAPOLIS (2000), http://www.min-neapolisfed.org/publications_papers/pub_display.cfm?id=35 35.
29. For a brief description of securitization, see Arthur E. Wilmarth, Jr., The Dark Side of Universal Banking: Financial Conglomerates and the Origins of the Subprime Financial Crisis, 41 CONN. L. REV. 963, 984-91 (2009).
30. See Saule Omarova, The Quiet Metamorphosis: How Derivatives Changed the "Business of Banking", 63 U. MIAMI L. REV. 1041 (2009)
31. see also Roger Lowenstein, When Genius Failed: The Rise And Fall Of Long-Term Capital Management 102-10 (2001)
32. Lynn Stout, Why the Law Hates Speculators: Regulation and Private Ordering in the Market for OTC Derivatives, 48 Duke L.J. 701, 767-70 (1999).
33. See, e.g., The Financial Services Act of 1999: Hearing Before the H.R. Subcomm. on Fin. and Hazardous Materials of the H. Comm. On Commerce, 106th Cong. 24-33 (1999) (statement by Alan Greenspan, Chairman, Federal Reserve Board of Governors.
34. William Jackson, CONG. Research Serv., IB 87061, Glass-Steagall Act: Commercial vs. Investment Banking 3 (1987).
35. For a timeline of legislative and regulatory changes in banking, see Century of Change, supra note 21.
36. See also Omarova supra note 23
37. Wilmarth supra note 21.
38. FIN. CRISIS IN- QUIRY COMM'N, THE FINANCIAL CRISIS INQUIRY COMMISSION REPORT 35, 55-56 (Jan. 2011) [hereinafter FCIC REPORT], available at http://www.fcic.gov/report.
39. See LOWENSTEIN supra note 23, at 102-10.
40. Franklin R. Edwards, Hedge Funds and the Collapse of Long-Term Capital Management, J. OF ECON. PERSPECTIVES, Spring 1999, at 189, 189-219.
41. 145 CONG. REC. 8,808-10, 28,343-44 (1999) (statements of Sen. Byron Dorgan (D- N.D.)).
42. Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act), Pub. L. No. 106-102, § 101, 113 Stat. 1338, 1341. Section 101 repealed Glass-Steagall Act § 20 and § 32, which prohibited affiliations between commercial and investment banks. However, it did not repeal some prohibitions on what these affiliates could do directly. Glass Steagall Act § 16, 12 U.S.C. § 24 (Supp. II 2008), which prohibits banks from underwriting or dealing unrestricted with most types of securities, and § 21, 12 U.S.C. § 378 (2006), which prohibits securities underwriters and dealers from accepting deposits, remain in force.
43. See Arthur E. Wilmarth, Jr., How Should We Respond to the Growing Risks of Financial Conglomerates?, in Financial Modernization After Graham-Leach-Bliley 65, 65 n.1 (Patricia C. McCoy ed., 2002), available at http://ssrn.com/abstract=291859.
44. Wilmarth K, supra note 21, at 312-13, 316-36
45. JOHNSON& KWAK supra note 15, at 57-64, 82-87
46. cf. James Lardner & Nomi Prins, Bigger Banks, Riskier Banks, DEMOS (Jan. 28, 2010), http://www.demos.org/pubs/BiggerRiskier-edit19.pdf (noting that the nation's biggest banks' revenue, and particularly trading revenue, continued to increase after the 2008 financial crisis and government bailout).
47. See, e.g., Report of Exam'r Anton R. Valukas at 59-60, In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y. 2010), available at http://lehmanreport.jenner.com/
48. see also FCIC REPORT, supra note 26, at 177, 196-97, 202-04, 223, 226-28, 256-57, 260-61, 280-81.
49. Jane D'arista, political econ. Research inst., leverage, proprietary trading and funding activities 1 (2009), available at http://www.peri.umass.edu/fileadmin/pdf/other_publication_types/SAFERbri efs/SAFER_issue_brief1.pdf
50. Viral V. Acharya & Matthew Richardson, Causes of the Financial Crisis, 21 CRITICAL REV. 195, 199-204 (2009) (citing proprietary holdings of asset-backed securities as one of the primary drivers of accumulated risk leading to the financial crisis).
51. FED. DEPOSIT INS. CORP. ("FDIC"), The Orderly Liquidation of Lehman Brothers Holdings Inc. Under the Dodd-Frank Act, 5 FDIC QUARTERLY, no. 2, 2011 at 1, available at http://www.fdic.gov/bank/analytical/quarterly/2011_vol5_2/lehman.pdf
52. Wilmarth supra note 22, at 1032-34.
53. John Cassidy, Subprime Suspect: The Rise and Fall of Wall Street's First Black C.E.O., NEW YORKER, Mar. 31, 2008, at 78, 86-88.
54. Joshua Rosner, Finan- cial Services Exposures to Subprime, Why we are not 'Seeing Red', WEEKLY SPEW (New York), July 26, 2007, at 1-4, 8 (on file with Authors)
55. Jake Bernstein & Jesse Eisinger, Banks' Self-Dealing Super-Charged Financial Crisis, PROPUBLICA (Aug. 26, 2010), http://www.propublica.org/article/banks-self-dealing-super-charged-finan cial-crisis (noting how firms in-creasingly took positions in each others' assets that they would not otherwise have been able to sell).
56. In general, "trading account" refers to accounts on the firms' books where assets are held for the near-term price appreciation of the asset.
57. See Fed. Reserve BD. of Governors, FR Y-9C, Instructions For Preparation Of Consolidated Financial Statements For Bank Holding Companies GL-76 (2007). What constitutes trading account assets is not consistent across firms. Nor do firms' reports distinguish between "pure" proprietary trading, which is targeted for prohibition by the Merkley-Levin provisions, and more client-oriented trading, such as underwriting or market-making, which is still permitted, subject to certain restrictions.
58. See David Reilly, Goldman Shows Some Ankle, WALL ST. J., Jan. 12, 2011, http://online.wsj.com/article/SB1000142405274870379190457607614420994863 6.html. One significant source of risky proprietary trading involved securitization activities, especially resecuritizations.
59. See FCIC REPORT, supra note 26, at 174-78, 188-212.
60. This graph is based on data from the firms' 10-K filings from years 2002-2007. The values presented are the value of trading account assets at the end of each fiscal year. All the firms listed had fiscal years that ended between November 30 and December 31.
61. Analysts have set forth how the largest, most systemically significant firms were able to borrow funds at relatively lower interest rates because creditors viewed them as "too big to fail." Lenders offered them advantageous rates on credit because they believed their risk of default was reduced; that is, the government would not permit them to fail.
62. See Dean Baker & Travis McArthur, CTR. For Econ. and Policy Research, the value of the "TOO BIG TO FAIL" BIG BANK SUBSIDY (2009), available at http://www.cepr.net/documents/publications/too-big-to-fail-2009-09.pdf.
63. See, e.g., Report of Exam'r Anton R. Valukas, supra note 32, at 59-62.
64. D'ARISTA supra note 32
65. Acharya & Richardson supra note 32, at 199-204.
66. Wilmarth K, supra note 22, at 1032-34.
67. Cassidy K, supra note 32, at 86-88. Indeed, many securitization transactions, in particular resecuritizations, would not have been possible absent firms' proprietary trading positions in the top tranches of those securities. As such, proprietary trading positions in these assets was a critical means through which many firms maintained their securitization deal flow.
68. See Jake Bernstein & Jesse Eisinger, The 'Subsidy': How a Handful of Merrill Lynch Bankers Helped Blow Up Their Own Firm, PROPUBLICA (Dec. 22, 2010), http://www.propublica.org/article/the-subsidy-how-merrill-lynch-traders- helped-blow-up-their-own-firm. Risk-based capital rules for commercial banks and their modified application to investment banks played an important role in facilitating the growth of the trading account in this manner.
69. See FCIC REPORT, supra note 26, at 49, 151.
70. See FCIC REPORT, supra note 26, at 190-95 (discussing the connection between certain securitization practices and proprietary trading).
71. Erik Gerding, Deregulation Pas De Deux: Dual Regulatory Classes of Financial Institutions and the Path to Financial Crisis in Sweden and the United States, 15 NEXUS 135, 151-60 (2010). On how complexity in products and trading amplifies risk and returns.
72. see generally Satyajit Das, Traders, Guns & Money: Knowns And Unknowns In The Dazzling World Of Derivatives (2006).
73. See also Lowen-Stein supra note 23, at 8-10.
74. See, e.g., Clive Horwood, Credit Suisse Rebuilds Its Model, EUROMONEY, July 2009, at 62, available at https://www.credit-suisse.com/investment_banking/doc/spotlight/euromoney_ award1.pdf ("[Credit Suisse] was a leader in the areas where investment banks were making the most money-notably commercial mortgage-backed securitization, private-equity sponsors, leveraged finance and proprietary trading. The bad news was that, as the market began to turn in 2007, those were the very sectors that were most at risk.").
75. FDIC, QUARTERLY BANKING PROFILE: FOURTH QUARTER 2007, at 12 (Dec. 31, 2007), available at http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP
76. see also FCIC REPORT, supra note 26, at 66.
77. Philip Augar, The Greed Merchants: How The Investment Banks Played The Free Market Game 16-21, 116-22, 216 (2005).
78. 156 CONG. REC. S2691 (daily ed. Apr. 27, 2010) (April 23, 2010 Letter from John Reed, Former Chairman and CEO, Citigroup, to Senators Jeff Merkley & Carl Levin).
79. See generally Annette Nazareth, Dir., S.E.C. Div. of Mkt. Regulation, Remarks before the SIA Compliance and Legal Division Member Luncheon (July 19, 2005), http://www.sec.gov/news/speech/spch071905aln.htm. On bonuses.
80. see also Megan Murphy & Patrick Jenkins, Ahead in the Clouds, FIN. TIMES, Mar. 15, 2011, at 7.
81. Jeremy Grantham, Lesson Not Learned: On Redesigning Our Current Financial System, GMO Q. LETTER SPECIAL TOPIC, 2 (Oct. 2009), http://www.scribd.com/doc/21682547/Jeremy-Grantham.
82. See Complaint of Plaintiff Basis Yield Alpha Fund (Master), Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc. (No. 10-CV-4527) (S.D.N.Y. June 9, 2010), 2010 WL 2483586.
83. Consent of Defendant Goldman, Sachs & Co. to Final Judgment at 2, SEC v. Goldman, Sachs & Co., No. 10-CV-3229 (S.D.N.Y. July 20, 2010)
84. FCIC REPORT, supra note 26, at 136, 235-36.
85. See generally Wall Street and the Financial Crisis: The Role of Investment Banks: Hearing Before the Permanent Subcomm. on Investigations of the S. Comm. on Home- land Sec. and Governmental Affairs, 111th Cong. (2010) [hereinafter Role of Investment Banks Hearing].
86. see also Jesse Eisinger & Jake Bernstein, The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going, PROPUBLICA (Apr. 9, 2010), http://www.propublica.org/article/all-the-magnetar-trade-how-one-hedge-f und-helped-keep-the-housing-bubble.
87. First Public Hearing of the Fin. Crisis Inquiry Comm'n 29-31 (Jan. 13, 2010) (statement of Phil Angelides, Chairman, Financial Crisis Inquiry Commission) (questioning Lloyd Blankfein, CEO and Chairman, Goldman Sachs Group, Inc.), available at http://fcic.gov/hearings/testimony/first-public-hearing
88. Ian Katz, Christine Harper & Joshua Gallu, Blankfein Response on Role Was 'Troublesome,' Angelides, BLOOMBERG (Jan. 13, 2010), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=AG4pskK68EdQ
89. see also 156 CONG. REC. S4057 (May 20, 2010) (statement of Sen. Merkley) (analogizing this to hiring an electrician who takes a fire policy out on your home).
90. Details of this transaction were highlighted by the Senate Permanent Subcommittee on Investigations, chaired by Senator Levin, during its hearings and in its 639-page bipartisan report on the causes of the financial crisis. Role of Investment Banks Hearing, supra note 43.
91. S. Permanent Subcomm. On investigations of the s. Comm. On homeland sec. And governmental affairs, 112th cong., wall street and the financial crisis: anatomy of a financial collapse 376-635 (Apr. 13, 2011) [hereinafter PSI WALL STREET REPORT].
92. Role of Investment Banks Hearing, supra note 43, at 405-409, 550 (Exhibits 54A, 86). Goldman was one of the first large firms to recognize the risk arising from bad subprime loans. This is in contrast to some of the other major Wall Street firms who in the last years before the crisis expanded their proprietary trading exposures to the U.S. mortgage market.
93. See FCIC REPORT, supra note 26, at 49, 151.
94. Report of Exam'r Anton R. Valukas, supra note 32, at 59-62.
95. see also Cassidy, supra note 32, at 86-88 (discussing the run up of $32 billion in collateralized debt obligation ("CDO") positions on the books of Merrill Lynch).
96. E.g., Role of Investment Banks Hearing, supra note 43, at 250-52 (Exhibits 3, 4).
97. Id. at 1081-82 (Exhibit 170A).
98. see also id. at 550-88 (Exhibits 86-90).
99. Id. at 588 (Exhibit 90).
100. Id. at 563 (Exhibit 87).
101. Laurie S. Goodman, Synthetic CDOs, in INVESTING IN COLLAT- ERALIZED DEBT OBLIGATIONS 141, 141-50, (Frank J. Fabozzi & Laurie S. Goodman eds., 2001).
102. Role of Investment Banks Hearing, supra note 43, at 563 (Exhibit 87), 234-35 (Exhibit 1A), 585 (Exhibit 88); Goodman, supra note 50, at 141-50.
103. Role of Investment Banks Hearing, supra note 43, at 563 (Exhibit 87).
104. Goodman, supra note 50, at 141-50.
105. Role of Investment Banks Hearing, supra note 43, at 563 (Exhibit 87).
106. Id. at 235 (Exhibit 1A).
107. Id. at 566 (Exhibit 87) (Goldman Sachs pitch book representing that "[a]ssets [are] sourced from the Street. Hudson Mezzanine Funding is not a Balance Sheet CDO.").
108. Id.; id. at 227-39 (Exhibit 1A).
109. Role of Investment Banks Hearing, supra note 43, at 134 (statement of Lloyd Blankfein, CEO and Chairman, Goldman Sachs Group, Inc.) ("In the context of market making, that is not a conflict.").
110. PSI WALL STREET REPORT, supra note 45, at 33, 604.
111. see also Amendments to Regulation SHO, Exchange Act Release No. 58775, 73 Fed. Reg. 61,690 (Oct. 14, 2008); FIN. STABILITY OVERSIGHT COUNCIL, STUDY AND RECOMMENDATIONS ON PROHIBITIONS ON PROPRIETARY TRADING & CERTAIN RELATIONSHIPS WITH HEDGE FUNDS & PRIVATE EQUITY FUNDS 18-19, 28-29 (2011) [hereinafter FSOC STUDY], available at http://www.treasury.gov/initiatives/Documents/Volcker%20sec%20%20619%20s tudy%20final%201%2018%2011%20rg.pdf
112. AUGAR, supra note 40, at 113 (noting the value to financial services firms of "the information they gain from looking at the flow going through their desk[:] The proprietary trading profits of the big investment banks are testimony to that." (citation omitted)).
113. Virginia B. Morris & Kenneth M. Morris, Standard & Poor's Dictionary Of Financial Terms 85 (2007).
114. See, e.g., Complaint at 2, SEC v. Donovan, No. 08 CA 10649RWZ (D. Mass. Apr. 16, 2008), available at http://www.sec.gov/litigation/complaints/2008/comp20528.pdf (alleging that trading ahead of orders by a trader in his personal account violated § 10(b) of the Exchange Act and Rule l0b-5, 17 C.F.R. § 240.10b-5 (2006)).
115. See, e.g., Nazareth, supra note 41.
116. AUGAR supra note 40, at 113.
117. Merrill Lynch, Pierce, Fenner & Smith, Inc., Exchange Act Release No. 63760, 2011 SEC LEXIS 280 (Jan. 25, 2011).
118. Id. at *6-10.
119. Id. at *8.
120. Because the SEC's administrative enforcement action resulted in a settlement, the legal theory of this case has not been tested in federal court. Moreover, the SEC case relied in part upon the allegation that the firm had promised customers it would maintain the confidentiality of their information. In the absence of such a representation, it is unclear whether the SEC would have had the authority to bring the action.
121. Id. at *6-10.
122. Acharya & Richardson supra note 32, at 199-204.
123. see also FCIC REPORT, supra note 26, at 177, 196-97, 202-04, 223, 226-28, 256-57, 260-61, 280-81
124. FDIC, supra note 32, at 1.
125. Wilmarth, Jr., supra note 22, at 1032-34.
126. Acharya & Richardson supra note 32, at 199-204.
127. Wilmarth supra note 32, at 1032-34. For more on the causes of the failure of the underlying assets in this particular crisis, including high-risk lending, consumer protection failures, and credit rating failures.
128. see generally PSI WALL STREET REPORT, supra note 45, at 48-317 and FCIC REPORT, supra note 26. However, proprietary trading is an independent source of significant risk as it drives firms into increasingly high-risk assets and high-risk trading strategies.
129. See, e.g., Gerding supra note 37, at 151-60. It also exposes them to increased risk when assets fail to perform as risk-models predict.
130. See, e.g., Lowenstein K, supra note 23, at 221-22 (discussing the collapse and bailout of Long-Term Capital Management).
131. Edwards supra note 27, at 199.
132. William D. Cohan, Inside the Bear Stearns Boiler Room, FORTUNE, Mar. 4, 2009, http://money.cnn.com/2009/03/02/magazines/fortune/cohan_houseofcards_ful l.fortune
133. see also FCIC REPORT, supra note 26, at 238-41, 256-57, 260-61, 280-81.
134. See, e.g., Shawn Tully, Wall Street's Money Machine Breaks Down, FORTUNE, NOV. 26, 2007, http://money.cnn.com/magazines/fortune/fortune_archive/2007/11/26/101232 838/
135. Evelyn M. Rusli, Citigroup's Write-Down Disaster, FORBES, Jan. 15, 2008, http://www.forbes.com/2008/01/15/citigroup-merrill-closer-markets-equity -cx_er_ra_0115markets45.html
136. James Quinn, JP Morgan Hit by $1.3bn Write-down, THE TELEGRAPH, Jan. 16, 2008, http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2782677/ JP-Morgan-hit-by-1.3bn-write-down.html.
137. Julia Kollewe, Write-Downs of Largest Banks Reach $274bn, THE GUARDIAN, July 29, 2008, http://www.guardian.co.uk/business/2008/jul/29/creditcrunch.
138. James Crotty, Gerald Epstein & iren levina, political econ. Research inst., proprietary trading is a bigger deal than many bankers and pundits claim 1 (2010) (citing Paul J. Davis, Michael MacKenzie & Aline Van Duyn, "Super-senior" CDO Investors Begin to Flex Their Muscles, FIN. TIMES, Apr. 14, 2008, at 39), available at http://www.peri.umass.edu/fileadmin/pdf/other_publication_types/SAFERbri efs/SAFER_note15.Pdf.
139. see also Hervé Hannoun, Deputy Gen. Manager, Bank for Int'l Settlements, Towards a Global Financial Stability Framework, 45th SEACEN Governors' Conference 12 (Feb. 26-27, 2010), available at http://www.bis.org/speeches/sp100303.pdf ("[T]he major losses during the 2007-09 financial crisis came from the trading book, especially the complex securitisation exposures such as collateralised debt obligations.").
140. CROTTY supra note 72
141. Acharya & Richardson supra note 32, at 206-08
142. see also Gary Gorton, The Panic of 2007, in MAINTAINING STABILITY IN A CHANGING FINANCIAL SYSTEM 131, 131-36 (Fed. Reserve Bank of Kan. City ed., 2009), available at http://www.kc.frb.org/publicat/sympos/2008/Gorton.03.12.09.pdf (particularly regarding the wholesale run on the fi-nancial system).
143. See FCIC REPORT, supra note 26, at 358-60.
144. see also Gorton K, supra note 73.
145. See Andrew Ross Sorkin, Lehman Files for Bankruptcy; Merrill Is Sold, N.Y. TIMES, Sept. 14, 2008, available at http://www.nytimes.com/2008/09/15/business/15lehman.html.
146. See id.
147. See Federal Reserve System Order Approving Formation of Bank Holding Companies (Sept. 21, 2008), available at http://www.federalreserve.gov/newsevents/press/orders/orders20080922a1.p df (approving the applications of The Goldman Sachs Group, Inc. and Goldman Sachs Bank USA Holdings L.L.C.).
148. See id. (approving the applications for Morgan Stanley, Morgan Stanley Capital Management L.L.C., and Morgan Stanley Domestic Holdings, Inc.).
149. Vikas Bajaj et al., As Goldman and Morgan Shift, a Wall St. Era Ends, DEALBOOK (Sept. 21, 2008), http://dealbook.nytimes.com/2008/09/21/goldman-morgan-to-become-bank-hol ding-companies.
150. See Warren Giles, UBS Gets $59.2 Billion Bailout; Credit Suisse Raises Capital, BLOOMBERG (Oct. 16, 2008), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=AH0AFa2SEHhw.
151. DETERMINING THE FAIR VALUE OF A FINANCIAL ASSET WHEN THE MARKET FOR THAT ASSET IS NOT ACTIVE, Staff Position No. FAS 157-3 (Fin. Accounting Standards Bd. 2008)
152. DETERMINING FAIR VALUE WHEN THE VOLUME AND LEVEL OF ACTIVITY FOR THE ASSET OR LIABILITY HAVE SIGNIFICANTLY DECREASED AND IDENTIFYING TRANSACTIONS THAT ARE NOT ORDERLY, Staff Position No. FAS 157-4 (Fin. Accounting Standards Bd. 2009)
153. INTERIM DIS-CLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, Staff Position No. FAS 107-1 (Fin. Accounting Standards Bd. 2009)
154. RECOGNITION AND PRESENTATION OF OTHER-THAN-TEMPO- RARY IMPAIRMENTS, Staff Position Nos. 115-2, 124-2 (Fin. Accounting Standards Bd. 2009)
155. see also Harry Huizinga & Luc Laeven, Accounting Discretion of Banks During a Financial Crisis 16-17, 21-22 (Int'l Monetary Fund, Working Paper No. 09/207, 2009), available at http://www.imf.org/external/pubs/ft/wp/2009/wp09207.pdf
156. Francesco Guerrera & Patrick Jenkins, Citi Puts $12.7bn Portfolio up for Sale, FIN. TIMES (Apr. 18, 2011), http://www.ft.com/cms/s/0/8c5fb104-69e0-11e0-89db-00144feab49a.html#axzz 1K0Cvpd5y ("In order to put the assets up for sale, Citi had to reverse an accounting manoeuvre performed during the crisis, when it moved them from its 'trading' book to its 'banking' book. Such a shift, which mirrored moves by other commercial banks, helped Citi to avoid suffering quarterly mark-to-market losses on those assets at the height of the turmoil. Before that move, the bank had suffered billions of dollars in losses on such assets that eventually prompted the US government to spend $45bn to bail it out.").
157. Although only the nineteenth largest U.S. bank, State Street is a systemically critical financial institution owing to the $19 trillion in custodial assets it holds. When certain private funds were threatened with collapse, State Street deployed $2.5 billion to rescue them. It, however, subsequently required several billion in emergency bailouts, including $2 billion in TARP funds. Raj Date, Test Case on the Charles, CAMBRIDGE WINTER CTR. FOR FIN. INSTS. POLICY (June 12, 2010), http://www.cambridgewinter.org/Cambridge_Winter/Archives/Entries/2010/6/ 12_TEST_CASE_ON_THE_CHARLES_files/state%20street%20volcker%20061210.pdf.
158. SPECIAL INSPECTOR GEN. FOR THE TROUBLED ASSET RELIEF PROGRAM, QUARTERLY RE- PORT TO CONGRESS: JULY 21, 2009 4, 37-38 (2009), available at http://www.sigtarp.gov/reports/congress/2009/July2009_Quarterly_Report_t o_Congress.pdf
159. see also infra note 88 and accompanying text.
160. Zhiguo He, In Gu Khang & Arvind Krishnamurthy, Balance Sheet Adjustments in the 2008 Crisis 11-12 (Nat'l Bureau of Econ. Research, Working Paper No. 15919, 2010).
161. Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, § 115, 122 Stat. 3765, 3780-83 (codified at 12 U.S.C. § 5225 (Supp. II 2008)).
162. Turmoil in U.S. Credit Markets: Recent Actions Regarding Government-Sponsored Entities, Investment Banks, and Other Financial Institutions: Hearing Before the S. Comm. on Banking, Hous., and Urban Affairs, 110th Cong. 26 (2008) (statement of Henry Paulson, Secretary, Department of the Treasury)
163. id. at 29 (statement of Ben Bernanke, Chairman, Federal Reserve Board of Governors).
164. E.g., Capital Purchase Program, DEP'T OF THE TREASURY, http://www.treasury.gov/initiatives/financial-stability/investment-progr ams/cpp/Pages/capitalpurchaseprogram.aspx (last visited Mar. 22, 2011) (describing the Capital Purchase Program, through which Treasury purchased senior preferred shares in about 700 financial institutions)
165. see also Troubled Asset Relief Program (TARP) Information, FED. RESERVE BD. OF GOVERNORS, http://www.federalreserve.gov/bankinforeg/tarpinfo.htm (last updated Apr. 21, 2010).
166. Matthew Ericson, Elaine He & Amy Schoenfeld, Tracking the $700 Billion Bailout, N.Y. TIMES, http://www.nytimes.com/packages/html/national/200904_CREDITCRISIS/recipi ents.html (last visited Mar. 22, 2011)
167. TARP Transactions Report, DEP'T OF THE TREASURY, http://www.treasury.gov/initiatives/financial-stability/briefing-room/re ports/tarp-transactions/Pages/default.aspx (last visited Mar. 22, 2011). Ally Financial (formerly GMAC Financial Services), General Motors, and Chrysler also received significant TARP funds.
168. Recent Balance Sheet Trends, FED. RESERVE BD. OF GOVERNORS, http://www.federalreserve.gov/monetarypolicy/bst_recenttrends_accessible .htm (last updated Mar. 18, 2011).
169. Usage of Federal Reserve Credit and Liquidity Facilities, FED. RESERVE BD. OF GOVER- NORS, http://www.federalreserve.gov/newsevents/reform_transaction.htm (last updated Mar 11, 2011).
170. See Press Release, Dep't of the Treasury, Treasury Announces Temporary Guarantee Program for Money Market Funds (Sept. 29, 2008), available at http://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx
171. Temporary Liquidity Guarantee Program: Fourth Quarter 2010, FED. DEPOSIT INS. CORP., http://www2.fdic.gov/qbp/2010dec/qbptlgp.html (last updated Feb. 23, 2011)
172. see also Diana B. Henriques, Treasury to Guarantee Money Market Funds, N.Y. TIMES, Sept. 19, 2008, available at http://www.nytimes.com/2008/09/20/business/20moneys.html.
173. Sewell Chan & Jo Craven McGinty, In Crisis, Fed Opened Vault Wide for U.S. and World, Data Shows, N.Y. TIMES, Dec. 2, 2010, at A1.
174. Neil Irwin & David Hilzenrath, Fed's Crisis Aid Benefited Firms Beyond Wall St., WASH. POST, Dec. 2, 2010, at A.
175. Dominic Rushe, US Fed Lent $3.3 Tn to Multinationals, Billionaires, and Foreign Banks, GUARDIAN, Dec. 3, 2010, available at http://www.guardian.co.uk/business/2010/dec/02/us-federal-reserve-bailou ts-multinationals.
176. See GALBRAITH supra note 13, at 46-51, 56-65.
177. See LOWENSTEIN supra note 23, at 163, 221-22 (detailing how the major Wall Street banks' proprietary holdings exposed them to huge losses if Long-Term Capital Management collapsed).
178. See, e.g., Thomas Frommherz, Morgan Stanley Chairman John Mack Tells Fox Business Network that Finance Reform Will Be More Difficult Due to Healthcare Debate, CEOWORLD MAG. (Mar. 23, 2010), http://ceoworld.biz/ceo/2010/03/23/morgan-stanley-chairman-john-mack-tel ls-fox-business-network-that-finance-reform-will-be-more-difficult-due-t o-healthcare-debate.
179. See, e.g., Goldman Sachs Group, Inc., Annual Report (Form 10-K) 27 (Jan. 27, 2009) ("We have 'long' proprietary positions in a number of our businesses. These positions are accounted for at fair value, and the declines in the values of assets have had a direct and large negative impact on our earnings in fiscal 2008." (emphasis added)); Bank of America Corp., Annual Report (Form 10-K) 7 (Feb. 27, 2009) ("We have a large portfolio of assets held for sale at any time in connection with our 'originate to distribute' strategy. We also have large proprietary trading and investment positions in a number of our businesses. These positions are accounted for at fair value, and the declines in the values of assets had a direct and large negative impact on our earnings in 2008, as well as the earnings of Merrill Lynch. We may incur additional losses " (emphasis added)).
180. See, e.g., Gerald Epstein, The Real Price of Proprietary Trading, BEAR MARKET INVESTMENTS (Feb. 23, 2010), http://www.bearmarketinvestments.com/gerald-epstein-the-real-price-of-pr oprietary-trading (discussing the role proprietary trading played in the firms' losses)
181. Dan Freed, Prop Trading Losses Ain't Peanuts, STREET (Jan. 27, 2010), http://www.thestreet.com/story/10668047/prop-trading-losses-aint-peanuts .html.
182. See FCIC REPORT, supra note 26, at 21.
183. Report of Exam'r Anton R. Valukas, supra note 46.
184. The Group of Thirty is a private, nonprofit international economic discussion group comprised of financial industry regulators, business executives, and academics. GROUP OF 30, http://www.group30.org (last visited Mar. 21, 2011).
185. WORKING GRP. ON FIN. STABILITY, THE GRP. OF THIRTY, FINANCIAL REFORM: A FRAMEWORK FOR STABILITY 27-28 (2009), available at http://fic.wharton.upenn.edu/fic/policy%20page/G30Report.pdf.
186. Establishing a Framework for Systemic Risk Regulation: Hearing Before the S. Comm. on Banking, Hous., and Urban Affairs, 111th Cong. 37 (2009) (statements by Sen. Merkley, Shelia Bair, Chairman, Federal Deposit Insurance Corporation, and Mary Shapiro, Chairman, Securities and Exchange Commission. Restoring American Financial Stability Act of 2009 (Discussion Draft), 111th Cong. § 989 (2009), available at http://banking.senate.gov/public/index.cfm?FuseAction=files.View&Fil eStore_id=943242e1-ca66-411c-89e2-8954eb3fc085.
187. See generally Wall Street and the Financial Crisis: The Role of High Risk Loans: Hearing Before the Permanent Subcomm. on Investigations of the S. Comm. on Homeland Sec. and Governmental Affairs, 111th Cong. (2010)
188. Wall Street and the Financial Crisis: The Role of Bank Regulators: Hearing Before the Permanent Subcomm. on Investigations of the S. Comm. on Homeland Sec. and Governmental Affairs, 111th Cong. (2010)
189. Wall Street and the Financial Crisis: The Role of Credit Rating Agencies: Hearing Before the Permanent Sub-comm. on Investigations of the S. Comm. on Homeland Sec. and Governmental Affairs, 111th Cong. (2010)
190. Role of Investment Banks Hearing, supra note 43.
191. DEP'T OF THE TREASURY, A NEW FOUNDATION: REBUILDING FINANCIAL SUPERVISION AND REGULATION 31-32 (2009), available at http://www.treasury.gov/initiatives/Documents/FinalReport_web.pdf (discussing the need to strengthen the "firewalls" in §§ 23A and 23B of the Federal Reserve Act that limited lending, derivatives transactions, and asset purchases and sales between banks and their affiliates).
192. See Dep't of the Treasury, Wall Street Reform: How We Got Here, FINANCIAL-STABILITY.GOV, http://replay.waybackmachine.org/20100826004406/
193. http://www.financialstability.gov/roadtostability/timeline.html (last visited Mar. 29, 2011).
194. DEP'T OF THE TREASURY, PRINCIPLES FOR REFORMING THE U.S. AND INTERNATIONAL REGULATORY CAPITAL FRAMEWORK FOR BANKING FIRMS 5-6 (2009), available at http://www.treasury.gov/press-center/press-releases/Documents/capital-st atement_090309.pdf. The Basel Committee on Banking Supervision is an effort by the bank regulators in twenty-seven countries to establish common regulatory approaches and standards for banks. Although its accords do not have the force of law, they serve as highly influential norms for member states.
195. History of the Basel Committee and its Membership, BANK FOR INT'L SETTLEMENTS, http://www.bis.org/bcbs/history.htm (last visited Mar. 21, 2011).
196. Stephen Labaton, Senate Plan to Overhaul Wall Street is Unveiled, N.Y. TIMES, Nov. 11, 2009, at B1.
197. see also Restoring American Financial Stability Act of 2009, 111th Cong. § 989 (2009) (Discussion Draft), available at http://banking.senate.gov/public/index.cfm?FuseAction=files.View&Fil eStore_id=943242e1-ca66-411c-89e2-8954eb3fc085.
198. Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, 111th Cong. § 1117 (2009) (as passed by House, Dec. 11, 2009).
199. See, e.g., Jackie Calmes & Louis Uchitelle, Obama Will Seek Limits on Banks, N.Y. TIMES, Jan. 21, 2010, at A1.
200. See, e.g., Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies: Hearing Before the S. Comm. on Banking, Hous., and Urban Affairs, 111th Cong. 5-8, 49-53 (2010) [hereinafter Prohibiting Certain High-Risk Activities] (statement by Paul Volcker, Chairman, President's Economic Recovery Advisory Board).
201. E.g., id. at 8-10, 53-56 (statement by Neal Wolin, Deputy Secretary, Department of the Treasury). Secretary Wolin's testimony also included a new proposal from the Treasury Department regarding restricting the size of financial institutions through limiting concentration in certain non-deposit lending markets, a provision that ultimately came to be § 622 of the Dodd-Frank Act. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111- 203, § 622, 24 Stat. 1376, 1632-34 (2010) (to be codified at 12 U.S.C. § 1852)
202. Prohibiting Certain High-Risk Activities, supra note 110, at 55-56 (statement by Neal Wolin). Although initially referred to as part of the Volcker Rule, the Authors and others generally view it as a separate, albeit important, provision from that which most call the "Volcker Rule."
203. Implications of the 'Volcker Rules' for Financial Stability: Hearing Before the S. Comm. on Banking, Hous., and Urban Affairs, 111th Cong. 6-8 (2010) (statements by John Reed and Simon Johnson, Professor of Entrepreneurship, Sloan School of Management, Massachusetts Institute of Technology).
204. Louis Uchitelle, Elders of Wall St. Favor Tight Rein, N.Y. TIMES, Feb. 17, 2010, at B1.
205. W. Michael Blumenthal, Nicholas Brady, Paul O'Neill, George Shultz & John Snow, Letter to the Editor, Congress Should Implement the Volcker Rule for Banks, WALL ST. J., Feb. 22, 2010
206. Thomas Hoenig, Comments on the Volcker Rule Activity Restrictions, FED. RESERVE BANK OF KAN. CITY (Mar. 2, 2010), http://www.kansascityfed.org/SpeechBio/HoenigPDF/VolckerRuleComments.03. 02.10.pdf.
207. See Rebecca Christie & Phil Mattingly, 'Volcker Rule' Draft Signals Obama Wants to Ease Market Impact, BLOOMBERG (Mar. 4, 2010), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=AHT_LKrSCQ1c.
208. Proprietary trading was defined as the purchase or sale of "stocks, bonds, options, commodities, derivatives, and other financial instruments" for the "trading book" of the firm and excluding "market making" and other activities "in facilitation of customer relation- ships," with terms such as "trading book" and "in facilitation of customer relationships" undefined. See Dep't of the Treasury, Amendment to the Bank Holding Company Act Regarding the Size of Institutions and the Scope of Bank Activities, TREASURY.GOV (2009), available at http://www.treasury.gov/initiatives/wsr/Documents/amend.final.-3-3-10.pd f.
209. See id.
210. See id.
211. See PROP Trading Act, S. 3098, 111th Cong. sec. 2, § 6 (2010) (amending Bank Holding Company Act of 1956).
212. Id. at sec. 2, § 6.
213. Id. at sec. 2, § 6(h)(2).
214. Id. at sec. 2, § 6(h)(1)(A).
215. Id. at sec. 2, § 6(e).
216. Id. at sec. 3, § 27B (amending the Securities Act of 1933).
217. Press Release, Office of Sen. Jeff Merkley, Merkley and Levin Introduce Legislation to Restrict Banks and the Largest Financial Institutions from Making High-Risk Bets (Mar. 10, 2010), available at http://merkley.senate.gov/newsroom/press/release/?id=8e6cb736-80c6-4d18- 8834-5d7d05e4501a.
218. Restoring American Financial Stability Act of 2010, S. 3217, 111th Cong. (as introduced to the S. Banking Comm. by Sen. Dodd, Mar. 15, 2010), available at http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFi nancialReformLegislationBill.pdf
219. see also Sewell Chan, With Financial Reform Bill, a Test for Congress, N.Y. TIMES, Mar. 14, 2010, available at http://www.nytimes.com/2010/03/15/business/15regulate.html
220. Sewell Chan, Reform Bill Adds Layer of Oversight, N.Y. TIMES, Mar. 15, 2010, available at http://www.nytimes.com/2010/03/16/business/16regulate.html.
221. S. 3217, 111th Cong. § 619(b) (as introduced to the S. Banking Comm. by Sen. Dodd, Mar. 15, 2010), available at http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFi nancialReformLegislationBill.pdf.
222. Id. at § 619(c).
223. Id. at § 619(g)(1)(A), (B).
224. M. MAUREEN MURPHY, CONG. RESEARCH SERV., EXTENT OF THE FINANCIAL STABILITY OVERSIGHT COUNCIL'S AUTHORITY TO MAKE RECOMMENDATIONS AND MODIFICATIONS IN THE PROHIBITIONS ON PROPRIETARY TRADING IN SECTION 619 OF S. 3217, THE RESTORING AMERICAN FINANCIAL STABILITY ACT OF 2010, REPORTED ON MARCH 22, 2010 BY THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS (Apr. 23, 2010) (stating that granting an executive branch agency the power to "modify" the statutory restrictions was novel, at best, and could lead to unintended and possibly adverse consequences). S. 3217, 111th Cong. (as passed by the S. Banking Comm., Mar. 22, 2010), available at http://banking.senate.gov/public/_files/032310MangersAmendmentAYO10627.p df (adding affiliates and subsidiaries of banks and bank holding companies to the coverage of the section S. 3217, 111th Cong. § 619 (as amended by S. Amdt. 3739, 111th Cong. (2010), 156 CONG. REC. S2814-973 (daily ed. Apr. 29, 2010), Apr. 29, 2010). The base text for Senate floor debate on financial reform was the Banking Committee proposal as amended by the Agriculture Committee's derivatives proposal. For example, the base text included the controversial proposal by Agriculture Committee Chairman Blanche Lincoln (D-Ark.) to bar banks from engaging in any derivatives activities, whether or not those activities were proprietary trading or not.
225. See id. at § 714.
226. Id. § 989 (as amended by S. Amdt. 3739, Apr. 29, 2010).
227. Senators Sherrod Brown, Edward Kaufman, Jeanne Shaheen, Dianne Feinstein, Bob Casey, Bill Nelson, Roland Burris (D-Ill.), Mark Begich (D-Alaska), Daniel Inouye (D-Haw.), Sheldon Whitehouse (D-R.I.), Claire McCaskill (D-Mo.), Mark Udall (D-Colo.), Barbara Mikulski (D-Md.), Bernard Sanders (I-Vt.), Tom Udall (D-N.M.), Jack Reed (D-R.I.), Richard Durbin (D-Ill.), Jim Webb (D-Va.), Tom Harkin (D-Iowa), Patty Murray (D-Wash.), John Kerry (D-Mass.), Barbara Boxer (D-Cal.), Russell Feingold (D-Wis.).
228. S. Amdt. 3931, 111th Cong. (2010), 156 CONG. REG. S3482-83 (daily ed. May 10, 2010) (amending S. 3217). This version, later amended, was ultimately passed by the Senate on May 27, 2010 as H.R. 4173, 111th Cong. (2010).
229. S. Amdt. 3931 sec. 619, § 13(i)(4), 156 CONG. REG. S3483 (daily ed. May 10, 2010).
230. This applied equally to the presumptive capital charges and quantitative restrictions for systemically significant nonbank financial companies.
231. S. Amdt. 3931 sec. 619, § 13(i)(5), 156 CONG. REG. S3483 (daily ed. May 10, 2010).
232. See 156 CONG. REC. S5894-99 (daily ed. July 15, 2010) (statements of Sens. Merkley and Levin).
233. see also Tom Braithwaite, Volcker Takes Aim at Long-Term Investments, FIN. TIMES (Jan. 20, 2011), http://www.ft.com/cms/s/0/2a03c58c-242a-11e0-a89a-00144feab49a.html.
234. See S. Amdt. 3931 § 619A, 156 CONG. REC. S3483 (daily ed. May 10, 2010)
235. see also Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 620, 124 Stat. 1376, 1631 (2010).
236. See S. Amdt. 4101, 111th Cong. (2010), 156 CONG. REC. S3935-38 (daily ed. May 18, 2010).
237. Id. at sec. 619, § 13(h)(1), 156 CONG. REC. S3938 (daily ed. May 10, 2010).
238. See id. at sec. 619, § 13(d)(1)(G), 156 CONG. REC. S3935 (daily ed. May 10, 2010).
239. Id. at sec. 619, § 13(c)(2), 156 CONG. REC. S3936 (daily ed. May 10, 2010).
240. 156 CONG. REC. S3961 (daily ed. May 19, 2010).
241. See id. at S4076-78 (daily ed. May 20, 2010) (statement by Sen. Reid (D-Nev.) and subsequent action).
242. See id. at S4078 (daily ed. May 20, 2010). The financial reform bill passed 59-39.
243. See Ryan Grim, Frank: 'Conceptual Agreement' Reached on Tougher Volcker Rule, HUFFINGTON POST (June 6, 2010), http://www.huffingtonpost.com/2010/06/10/frank-volcker-rule-deal_n_60827 7.html
244. Compare S. Amdt. 4101, 111th Cong. (2010), 156 CONG. REC. S3935-38 (daily ed. May 18, 2010), with Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 619, 124 Stat. 1376, 1620-31 (2010) (to be codified at 12 U.S.C. § 1851) (amending Bank Holding Company Act of 1956). The most well-known compromise was the provision permitting banks to take deminimis positions in private funds they organized and offered to customers. Another provision was the allowance of permitted services, designed to enable banks to engage in prime brokerage for funds in which their managed funds invest.
245. See Dodd-Frank Act sec. 619 § 13(d)(1)(G)(v), 13(d)(4), 13(f)(3), 124 Stat. at 1624-28.
246. see also 156 CONG. REC. S5901 (daily ed. July 15, 2010) (statements of Sens. Merkley, Levin, and Dodd).
247. See Conference on Financial Regulations Bill, Day 7, Part 8, Final Vote (C-SPAN television broadcast June 24, 2010), available at http://www.c-spanvideo.org/program/Part8F (Conference Chairman Rep. Barney Frank (D-Mass.) accepting the Senate offer regarding Title VI).
248. see also 156 CONG. REC. S5893-99 (daily ed. July 15, 2010) (statements of Sens. Merkley and Levin). 156 CONG. REC. S5893-99 (daily ed. July 15, 2010) (statements of Sens. Merkley and Levin). 156 CONG. REC. H5261, S5933 (daily ed. July 15, 2010).
249. Jim Puzzanghera, Financial Overhaul is Signed Into Law, L.A. TIMES, July 22, 2010, at A1.
250. Dodd-Frank Act §§ 619-21, 124 Stat. at 1620-32.
251. See, e.g., Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 881 (codified as amended in scattered sections of 15 U.S.C. (2006)).
252. Securities Act of 1933, Pub. L. No. 73- 22, 48 Stat. 74 (codified as amended in scattered sections of 15 U.S.C. (2006)).
253. Federal Reserve Regulation T, 12 C.F.R. § 220 (2010).
254. See Omarova supra note 23.
255. See 156 CONG. REC. S5894-99 (daily ed. July 15, 2010) (statements of Sens. Merkley and Levin).
256. FSOC STUDY, supra note 58, at 15.
257. Letter from Paul Volcker, to the Fin. Stability Oversight Council (Oct. 29, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-0045.
258. For additional details regarding the operation of the provisions, see 156 CONG. REC. S5894-99 (daily ed. July 15, 2010) (statements of Sens. Merkley and Levin).
259. Dodd-Frank Act sec. 619, § 13(a)(1)(A), 124 Stat. at 1620.
260. Dodd-Frank Act sec. 619 § 13(a)(2), 124 Stat. at 1620.
261. See 156 CONG. REC. S5894 (daily ed. July 15, 2010) (statement of Sen. Merkley).
262. See id. at S5895 (daily ed. July 15, 2010).
263. see also Letter from Sen. Tom Harkin to the Fin. Stability Oversight Council (Oct. 22, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-0040.1.
264. Dodd-Frank Act sec. 619, § 13(h)(1), 124 Stat. at 1629.
265. See Letter from John Reed to the Fin. Stability Oversight Council (Nov. 1, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-1082.1
266. see also Letter from Joseph Stiglitz, Professor, Columbia Bus. Sch., Columbia Univ., to the Fin. Stability Oversight Council (Nov. 4, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-1133.1.
267. See generally Letter from Jeff Mahoney, Gen. Counsel, Council of Inst. Investors, to the Fin. Stability Oversight Council (Oct. 28, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-0355.1.
268. Dodd-Frank Act sec. 619, § 13(d)(3), 124 Stat. at 1626; id. at §§ 113-15, 124 Stat. at 1398-1406.
269. Id. at sec. 619, § 13(h)(4), 124 Stat. at 1630.
270. Id. at sec. 619, § 13(h)(6), 124 Stat. at 1630.
271. see Letter from Robert Johnson, Dir. of Econ. Policy, Roosevelt Inst., to Fin. Stability Oversight Council (Nov. 4, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-1263.1
272. 156 CONG. REC. S5895 (daily ed. July 15, 2010) (statement of Sen. Merkley).
273. Tom Braithwaite, Volcker Takes Aim at Long-Term Investments, FIN. TIMES (Jan. 20, 2011), http://www.ft.com/cms/s/0/2a03c58c-242a-11e0-a89a-00144feab49a.html.
274. FSOC STUDY, supra note 58, at 27-28.
275. Id.
276. See, e.g., Christine Harper & Saijel Kishan, Goldman Sachs Said to Shut Principal Strategies Unit, BLOOMBERG (Sept. 4, 2010), http://www.bloomberg.com/news/2010-09-03/goldman-said-to-shut-principal- strategies-unit-to-comply-with-volcker-rule.html
277. accord Mark Jewell, Source: JPMorgan Chase Halting Proprietary Trading, USA TODAY (Aug. 31, 2010), http://www.usatoday.com/money/industries/banking/2010-08-31-jpmorgan-pro prietary-trading_N.htm.
278. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, sec. 619, § 13(a)(1)(B), 124 Stat. 1376, 1620 (2010) (to be codified at 12 U.S.C. § 1851).
279. Dodd-Frank Act sec. 619 § 13(h)(5), 124 Stat. at 1630 (to be codified at 12 U.S.C. § 1851).
280. Dodd-Frank Act sec. 619 § 13(c)(2)-(3), 124 Stat. at 1622-23 (to be codified at 12 U.S.C. § 1851
281. Dodd-Frank Act sec. 619 § 13(h)(2), 124 Stat. at 1630 (to be codified at 12 U.S.C. § 1851).
282. Commodity pools are investment vehicles formed for the purpose of trading in commodity interests, including futures contracts, commodity options or options on futures.
283. Nora Jordan, et al., ADVISING PRIVATE FUNDS: A COMPREHENSIVE GUIDE TO REPRESENTING HEDGE FUNDS, PRIVATE EQUITY FUNDS AND THEIR ADVISERS § 4.19 (2011).
284. See Gary Gensler, Chairman, Commodity Futures Trading Comm'n, Comments During Meeting of the Financial Stability Oversight Council (Jan. 18, 2011).
285. Dodd-Frank Act sec. 619, § 13(d)(1), 124 Stat. at 1623-26 (to be codified at 12 U.S.C. § 1851).
286. Dodd-Frank Act sec. 619, § 13(a)(2), 124 Stat. at 1620-21 (to be codified at 12 U.S.C. § 1851).
287. Dodd-Frank Act sec. 619, § 13(a)(2), 13(d)(3), 124 Stat. at 1620-21, 1626 (to be codified at 12 U.S.C. § 1851
288. Dodd-Frank Act sec. 619, § 13(d)(1)(B), 124 Stat. at 1624 (to be codified at 12 U.S.C. § 1851).
289. See Letter from Ams. for Fin. Reform to the Fin. Stability Oversight Council (Nov. 3, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-1328.1.
290. William L. Silber, On the Nature of Trading; Do Speculators Leave Footprints?, J. PORTFOLIO MGMT., Summer 2003, at 64, 64-70
291. Letter from Ams. for Fin. Reform, supra note 182.
292. Letter from William L. Silber, Professor of Fin. and Econ., Stern Sch. of Bus., N.Y. Univ., to the Fin. Stability Oversight Council (Nov. 2, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-0185.1
293. Letter from Paul Volcker, supra note 156.
294. FSOC STUDY, supra note 58, at 18-19.
295. See AUGAR supra note 40, at 116-22
296. see also, e.g., Citigroup Inc., Annual Report (Form 10-K), 9 (Feb. 22, 2008) (noting the 2007 acquisition of Automated Trading Desk, "a leader in electronic market making and proprietary trading").
297. See PSI WALL STREET REPORT, supra note 45, at 604.
298. Amendments to Regulation SHO, Exchange Act Release No. 58775, 73 Fed. Reg. 61,690 (Oct. 14, 2008)
299. Letter from Ams. for Fin. Reform, supra note 182, at 7-9.
300. See Silber On the Nature of Trading, supra note 183, at 70 n.3.
301. see also FSOC STUDY, supra note 58, at 28-29
302. See FDIC, supra note 32, at 1.
303. FCIC REPORT, supra note 26, at 174-78, 188-212.
304. The rule of construction in section (g) regarding securitization does not contradict this statutory directive. Rather, it simply was intended to provide comfort to community banks in particular that the provisions would not be read to prohibit the sale of loans as part of the securitization process. See Dodd-Frank Act sec. 619, § 13(g)(2), 124 Stat. at 1629 (to be codified at 12 U.S.C. § 1851); 156 CONG. REC. S5896 (daily ed. July 15, 2010) (statement of Sen. Merkley).
305. See Dodd-Frank Act sec. 619, § 13(d)(1)(B), 124 Stat. at 1624 (to be codified at 12 U.S.C. § 1851).
306. Andrew Ross Sorkin, Davos Bankers Seek One Message on Volcker Rule, N.Y. TIMES, Feb. 2, 2010, available at http://www.nytimes.com/2010/02/02/business/02sorkin.html?dbk.
307. See Role of Investment Banks Hearing, supra note 43, at 134 (statement of Lloyd Blankfein, CEO and Chairman, Goldman Sachs Group, Inc.) ("In the context of market mak-ing, that is not a conflict.").
308. See Letter from Dennis Kelleher, President, Better Markets Found., to the Fin. Stability Oversight Council (Nov. 5, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-1363.1.
309. FSOC STUDY, supra note 58, at 22-25, 36-43.
310. See Dodd-Frank Act §§ 151-56, 728-30, 766, 124 Stat. at 1412-20, 1697-703, 1797-99 (to be codified at scattered sections of 7, 12, 15 U.S.C.).
311. Large Trader Reporting System, Exchange Act Release No. 61908, 75 Fed. Reg. 21456 (proposed Apr. 14, 2010) (to be codified at 17 C.F.R. §§ 240.13h-1, 249.327).
312. FSOC STUDY, supra note 58, at 31.
313. Silber On the Nature of Trading, supra note 183, at 64-70.
314. Letter from Paul Volcker, supra note 156. In addition, particular attention should be paid to market-making in over-the-counter derivatives, as they may present particular challenges to oversight and pose outsized risks to the institutions that use them and to the financial system as a whole.
315. See Letter from Lynn Stout, Professor of Corporate and Sec. Law, Univ. of Cal. at L.A., to the Fin. Stability Oversight Council (Nov. 4, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-1300.1.
316. See Murphy & Jenkins supra note 41.
317. 156 CONG. REC. S5896 (daily ed. July 15, 2010) (statement of Sen. Merkley). Interest rate risk is the risk to a financial institution arising from changes in the interest rates, which would affect the value or certain other aspects of its holdings of loans or bonds. Credit risk is the risk of default of a financial instrument.
318. Frederic S. Mishkin, The Economics Of Money, Banking & Financial Markets 232 (9th ed. 2010).
319. FSOC STUDY, supra note 58, at 20-21.
320. Id. at 23, 30.
321. Id. at 23 n.24.
322. See Letter from Robert Johnson, supra note 166.
323. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, sec. 619, § 13(d)(1)(C), 124 Stat. 1367, 1623-26 (2010) (to be codified at 12 U.S.C. § 1851).
324. FSOC STUDY, supra note 58, at 30.
325. Dodd-Frank Act sec. 619, § 13(d)(1)(G), 124 Stat. at 1624-25 (to be codified at 12 U.S.C. § 1851).
326. Dodd-Frank Act sec. 619, § 13(d)(1)(G), (d)(4), 124 Stat. at 1624-27 (to be codified at 12 U.S.C. § 1851).
327. 156 CONG. REC. S5901 (daily ed. July 15, 2010) (statements of Sens. Merkley, Levin, and Dodd).
328. Dodd-Frank Act sec. 619, § 13(d)(1)(G)(v), 13(d)(4), 124 Stat. at 1624-27 (to be codified at 12 U.S.C. § 1851).
329. Id.
330. see also FSOC STUDY, supra note 58, at 65-67.
331. See Letter from Robert Illig, Professor of Law, Univ. of Or., to the Fin. Stability Over- sight Council (Nov. 5, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-1318.1
332. see also Date, supra note 82 (discussing State Street's use of off-balance-sheet vehicles to take proprietary positions in asset-backed commercial paper).
333. See 156 CONG. REC. S5901 (daily ed. July 15, 2010) (statement of Sens. Merkley, Levin, and Dodd)
334. Letter from Ams. for Fin. Reform, supra note 182.
335. Letter from Sen. Tom Udall to Fin. Stability Oversight Council (Nov. 5, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-1132.1.
336. Letter from Richard Trumpka, President, AFL-CIO, to the Fin. Stability Oversight Council (Nov. 4, 2010), http://www.regulations.gov/#!documentDetail;D=FSOC-2010-0002-1366.1
337. Id.
338. see, e.g., Date, supra note 82.
339. Arthur E. Wilmarth, Jr., How Should We Respond to the Growing Risks of Financial Conglomerates?, in Financial Modernization After Graham-Leach-Bliley 65, 80-87 (Patricia C. McCoy ed., 2002), available at http://ssrn.com/abstract=291859.
340. see also Arthur E. Wilmarth, Jr., Reforming Financial Regulation to Address the Too-Big-To-Fail Problem, 35 BROOK. J. INT'L L. 707, 774-76 (2010).
341. See, e.g., FCIC REPORT, supra note 26, at 286 (detailing how the collapses of certain Bear Stearns funds led to the government-backed bailout of the firm itself).
342. Date, supra note 82 (explaining how State Street Bank bailed out funds it managed, but then itself needed several emergency taxpayer-backed programs).
343. see also Letter from Richard Trumpka, supra note 213.
344. See Date, supra note 82.
345. see also FCIC REPORT, supra note 26, at 286.
346. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, sec. 619, § 13(d)(1)(G)(v), 124 Stat. 1376, 1625 (2010) (to be codified at 12 U.S.C. § 1851).
347. Dodd Frank Act § 13(f)(4), 124 Stat. at 1629 (to be codified at 12 U.S.C. § 1851).
348. Dodd Frank Act § 13(f)(3), 124 Stat. at 1628 (to be codified at 12 U.S.C. § 1851).
349. 156 CONG. REC. S5901 (daily ed. July 15, 2010) (statements of Sens. Merkley, Levin, and Dodd).
350. Dodd-Frank Act sec. 619, § 13(f)(3), 124 Stat. at 1628 (to be codified at 12 U.S.C. § 1851).
351. see also Letter from Paul Volcker, supra note 156 (on the importance of the "tone at the top" for effective implementation of § 619).
352. See FCIC REPORT, supra note 26, at 286.
353. Dodd-Frank Act sec. 619, § 13(f)(1), 124 Stat. at 1628 (to be codified at 12 U.S.C. § 1851)
354. See FSOC STUDY, supra note 58, at 70.
355. Dodd-Frank Act sec. 619, § 13(e), 124 Stat. at 1627-28 (to be codified at 12 U.S.C. § 1851).
356. see also Letter from Dennis Kelleher, supra note 193.
357. Letter from John Reed, supra note 163.
358. Dodd-Frank Act sec. 619, § 13(d)(1), (3), 124 Stat. at 1623-26 (to be codified at 12 U.S.C. § 1851).
359. see also Letter from Dennis Kelleher, supra note 193.
360. The backstop against material conflicts of interest is discussed in greater detail infra in Part IV.D.
361. Dodd-Frank Act sec. 619, § 13(d)(2), 124 Stat. at 1626 (to be codified at 12 U.S.C. § 1851).
362. For a discussion of possible risks from trading strategies, see Edwards, supra note 27, at 197-99.
363. see also LOWENSTEIN, supra note 23, at 8-10. For a discussion of how trading strategies can threaten markets in individual products, by analogy to CDO markets.
364. see Joseph R. Mason & Joshua Rosner, How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions? 28-35 (Feb. 13, 2007) (unpublished manuscript), available at http://ssrn.com/abstract=1027472.
365. FSOC STUDY, supra note 58, at 51.
366. See id.
367. On the challenges of VaR and internal risk models, see generally Daniel K. Tarullo, Banking on Basel: The Future of Financial Regulation (2008).
368. Erik Gerding, Code, Crash, and Open Source: The Outsourcing of Financial Regulation to Risk Models and the Global Financial Crisis, 84 WASH. L. REV. 127 (2009).
369. Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act: Hearing Before the S. Comm. on Banking, Hous., and Urban Affairs, 111th Cong. (2010) [hereinafter Implementation Hearing] (statement of Ben Bernanke, Chairman, Federal Re- serve Board Of Governors) (noting that the Office of Financial Research could gather more detailed position data than is currently available for regulators, which may be the only way to identify systemic risks).
370. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, sec. 619, § 13(d)(2)(A)(i), 124 Stat. 1376, 1626 (2010) (to be codified at 12 U.S.C. § 1851) (amending Bank Holding Company Act of 1956).
371. id. sec. 621, § 27B, 124 Stat. at 1631-32 (to be codified at 15 U.S.C. § 77z-2a) (amending Securities Act of 1933).
372. Dodd-Frank Act sec. 621, § 27B, 124 Stat. at 1631-32 (to be codified at 15 U.S.C. 77z-2a).
373. See Role of Investment Banks Hearing, supra note 43.
374. supra Part II.D.1.
375. See 156 CONG. REC. S5901-02 (daily ed. July 15, 2010) (statements of Sens. Merkley, Levin, and Dodd).
376. See supra Part II.D.1.
377. 156 CONG. REC. S5899 (daily ed. July 15, 2010) (statement of Sen. Levin).
378. A disclosure that a firm "may" trade or take a position that is opposite an investor is insufficient to cure a conflict of interest, and in fact may be its own material misrepresentation if, at the time of the disclosure, the firm knows that it did or would take such a position.
379. See SEC v. Czuczko, No. CV 06-4792 (C.D. Cal. Dec. 5, 2007).
380. See 156 CONG. REC. S5901-02 (daily ed. July 15, 2010) (statements of Sens. Merkley, Levin, and Dodd).
381. See Dodd-Frank Act sec. 621, § 27B(b), 124 Stat. at 1632 (to be codified at 15 U.S.C. 77z-2a.
382. Dodd-Frank Act sec. 619, § 13(d)(2)(A)(i), 124 Stat. at 1626 (to be codified at 12 U.S.C. § 1851) (providing that "a material conflict of interest" will be defined by rule-making under § 13(b)(2)).
383. On separation of functions as a solution to conflicts of interest, see AUGAR supra note 40, at 217-20.
384. Louise Story, Banks Shared Clients' Profits, but Not Losses, N.Y. TIMES, Oct. 17, 2010, available at http://www.nytimes.com/2010/10/18/business/18advantage.html.
385. FSOC STUDY, supra note 58, at 49.
386. Dodd-Frank Act sec. 619, § 13(b)(1), 124 Stat. at 1621 (to be codified at 12 U.S.C. § 1851).
387. FSOC STUDY, supra note 58.
388. Id. at 3, 33-36.
389. Id. at 3, 43-46.
390. Id. at 3.
391. See id. at 33-36.
392. Letter from Paul Volcker, supra note 156.
393. Letter from Paul Volcker, supra note 156.
394. See, e.g., Implementation Hearing, supra note 233 (statement of Sen. Jack Reed).
395. FSOC STUDY, supra note 58, at 31.
396. See, e.g., Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §§ 728-30, 766, 124 Stat. 1376, 1697-1703, 1797-99 (2010) (to be codified in scattered sections of 7 U.S.C. and 15 U.S.C. § 78m-1) (providing for the creation of swap data repositories and regulating reporting to them).
397. See, e.g., Consolidated Audit Trail, Exchange Release No. 62174, 75 Fed. Reg. 32556 (proposed May 26, 2010) (to be codified at 17 C.F.R. § 242.613).
398. Large Trader Reporting System, Exchange Act Release No. 61908, 75 Fed. Reg. 21456 (proposed Apr. 14, 2010) (to be codified at 17 C.F.R. §§ 240.13h-1, 249.327).
399. Dodd-Frank Act §§ 151-56, 124 Stat. at 1412-20 (to be codified in scattered sections of 12 U.S.C).
400. See generally Letter from Joseph Stiglitz, supra note 163.