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FinReg Update: Senators Push Credit Ratings Reform, Volcker Rule for Final Bill

It has been a quiet week on the financial regulatory reform front, but that does not mean the deal-making has stopped. With the House and Senate out of session this week, Sen. Al Franken (D-Minn.) has been pushing his provision to reform the credit ratings agencies, and Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) have argued for their strengthened Volcker Rule, which bars commercial banks from betting with their own money or owning hedge funds. And it seems momentum is building behind both provisions.

Credit ratings agencies are in the news, given Warren Buffett’s ill-received and contradictory testimony to the Financial Crisis Inquiry Commission yesterday. And Franken says that he expects the financial regulatory reform bill to emerge from the conference committee with his provision in place.

Franken wants an independent board, appointed by regulators, to choose the firms that rate investments, such as bundles of mortgage-backed securities. Historically, investment firms that created the securities have picked ratings firms. Franken says that was foolish. “Rating agencies knew that if they gave a bad rating to an instrument then they wouldn’t get the next job to do the rating,” Franken said. “So, what it did was it incentivized inflating the ratings. That’s why we have all these AAA-rated instruments that turned out to be junk.”

But Larry Summers, the head of the White House’s National Economic Council, is not on board. Ryan Grim at HuffPo reports on a meeting Summers, who acts as a proxy for the White House on economic issues, held with union leaders yesterday:

There were few surprises, attendees said, with Summers and the groups mostly in accord. The one divergence came over Minnesota Democratic Al Franken’s rating agency amendment, which would end the practice of banks choosing their own rating agencies and instead assign them by lottery, removing a colossal conflict of interest. Summers told the groups that he has yet to be persuaded that Franken’s approach is the proper one but he is willing to be convinced. He asked Public Citizen’s David Arkush and Demos’s Heather McGhee, representatives of two of the most vocal supporters of the amendment, which is part of the Senate package, for more information.

And on the Merkley-Levin amendment, the Financial Times cites unnamed sources when reporting that the stronger Volcker Rule might be swapped for Sen. Blanche Lincoln’s (D-Ark.) controversial provision forcing banks to spin out their swaps trading desks, which speculate and trade a certain type of derivative.

[A] proposal — opposed by banks — to toughen a ban on proprietary trading and stop them from betting against products they sell to customers has re-emerged during preparatory work. The provision, sponsored by Jeff Merkley and Carl Levin, two Democratic senators, would toughen the “Volcker rule,” which bans banks from trading for their own account or owning hedge funds and private equity firms, but gives regulators time to study the rule and modify it. “That is a very wishy-washy way to approach the issue,” Mr. Merkley said.

Mr. Levin said even though the Treasury would “probably…want as much power as they can get to…modify [the bill],” he thought Congress should write a strong final version. “Merkley-Levin in general is very much alive,” Mr. Levin said. “The proprietary trading provisions from a legislative perspective are very much in the mix.”

Others involved agreed with that assessment and said the proposal could be used to replace a provision by Senator Blanche Lincoln that would force banks to spin off swaps desks.

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