WASHINGTON — White House economic adviser Paul Volcker this week raised concerns about a provision in the Senate financial bill that would force commercial banks to spin off their swap desks into affiliates in order to receive federal financial assistance.
The provision, which aims to prevent bailouts of clearinghouses and bank swap dealers, has met with strong resistance already from many Republicans as well as the Federal Reserve, Treasury Secretary Timothy Geithner and the Federal Deposit Insurance Corp. It is being pushed by Senate Agriculture Chairman Blanche Lincoln, D-Ark., who this week took to the floor to vigorously defend her proposal by saying it is necessary to protect Main Street from risky trading on Wall Street.
In a letter sent to Senate Banking Chairman Chris Dodd, D-Conn., this week, former Fed Chairman Volcker said he can "understand the concerns that have motivated Senator Lincoln," but that he also shares "the concerns about the extensive reach of Senator Lincoln's proposed amendment" because it would interfere with bank's normal derivatives trading with their customers.
"The provision of derivatives by commercial banks to their customers in the usual course of a banking relationship should not be prohibited," he wrote.
Sen. Lincoln, when asked about the letter, immediately issued a statement through a spokeswoman Friday saying she still believes her proposal must be included in the broader bill.
"I have great respect for Chairman Volcker and agree with his proposal to require banks to push out certain trading operations," she said. "Absent my provision, however, we have not done enough to address the massive size of entities that became so large that taxpayers were left with no option but to bail them out. My provision begins to cut down the size of these institutions by moving this risky activity into fully regulated entities, protecting American taxpayers."
Volcker, who is now the chairman of the President's Economic Recovery Advisory Board, has been pushing a proposal now known as the "Volcker Rule," which aims to crack down on the size and risk at financial companies in part by placing restrictions on proprietary trading by banks.
Elements of the rule are included in the Senate financial bill already, but Sens. Carl Levin, D-Mich., and Jeff Merkley, D-Ore., want to include additional language in the bill that would bar taxpayer-insured banks and their affiliates and subsidiaries from engaging in proprietary trading of high-risk securities.
Volcker said in his letter to Dodd that he believes current language in the financial bill as well as the proposal from Merkley and Levin "satisfy my concerns and those of many others with respect to bank trading in derivatives."