The Volker Rule

A proposal by American economist and former Federal Reserve Chairman Paul Volcker restricted banks from making certain kinds of speculative investments. Volcker argued that such speculative activity played a key role in the financial crises of 2007 -2010.
Democratic Senators Jeff Merkley and Carl Levin introduced a major piece of legislation the at included the Volcker Rule, which placed limitations on proprietary trading. However, despite having wide support in the Senate, the amendment was never given a vote.

The House-Senate conference committee passed a strengthened Volcker rule by including the language prepared by Senators Merkley and Levin. The advantage of that language was that it covered more types of proprietary trading than the original rule proposed by Obama administration. It also bans conflict of interest trading, because a Goldman Sachs investigation showed, business as usual on Wall Street has for too long allowing banks to create instruments which were 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 ended that type of conflict which Wall Street has engaged in.

Unfortunately, conferees changed the proprietary trading ban to allow banks to invest in hedge funds and private equity funds at the request of Republican Senator Scott Brown of Massachusetts. Senator Brown’s vote was needed in the Senate to pass the bill into law. Consequently, proprietary trading in Treasury bonds issued by government-backed entities like Fannie Mae and Freddie Mac, as well as municipal bonds are presently exempted.