Yes, Merkley-Levin Is Still a Joke

Even though Merkley-Levin didn't make it into the Senate bill, there's still a chance that the Merkley-Levin language will make it into the conference report, so I want to respond to the defenses of the amendment that were offered. (My original post is here.) Mike Konczal wrote a post defending Merkley-Levin that was badly confused, on several levels.



First, Konczal writes:

I think Merkley-Levin is way ahead of this critique, and what EoC doesn’t mention is that the bill provides for this. In case they excluded too much from permitted activities at the statutory level, regulators can add some provided it meets a certain threshold (p. 10):

‘‘(d) PERMITTED ACTIVITIES…(I) Such other activity as the appropriate Federal banking agencies, in consultation with the Securities and Exchange Commission and the Commodity Futures Trading Commission, jointly determine through regulation, as provided for in subsection (c), would promote and protect the safety and soundness of the banking entity or nonbank financial company and the financial stability of the United States.

If there are activities that could be justified in promoting safety and soundness, regulators can include them into the bucket of permitted activities. Note that this is a fairly high bar to hurdle, so regulators have to make a fairly good excuse to go for it.

This is not a point in Merkley-Levin's favor, and I have no idea why Konczal thinks it is. The point I made was that the 9 categories of "permitted activities," which function like exceptions to a ban on proprietary trading, were way, way too broad, and would effectively swallow the prop trading ban. The provision Konczal cited is one of the 9 categories of permitted activities. It's what's known as a "catch-all" exception. Essentially, this says that in the unlikely event that a trade can't be justified under one of the 8 other ridiculously broad exceptions, there's yet another catch-all exception the trade could potentially fall under. This does not help Konczal's argument.



Next, he cites section (d)(3) of Merkley-Levin, which provides:

(3) CAPITAL AND QUANTITATIVE LIMITATIONS.—The Board, in consultation with the Securities and Exchange Commission and the Commodity Futures Trading Commission, shall adopt rules imposing additional capital requirements and quanitative limitations regarding the activities permitted under this section if the Board determines that additional capital and quantitative limitations are appropriate to protect the safety and soundness of the banking entities and nonbank financial companies engaged in such activities.

This provision is completely irrelevant. It essentially just says that regulators can raise capital requirements of impose quantitative limitations in order to protect the "safety and soundness" of the BHC. Uh, great, but prudential regulators already have that authority. (In fact, for technical reasons, this provision of Merkley-Levin would almost certainly have to be stripped out, because it would directly conflict with several other provisions of existing law. Like I said, very poor drafting.)



Finally, Konczal makes the "it's a floor, not a ceiling" argument. He notes that Merkley-Levin gives regulators the authority to force BHCs to terminate activities that the regulator determines are "intended to evade the requirements of this section (including through an abuse of any permitted activity)." This misses the entire point, which is that prop trades wouldn't need to evade the requirements of Merkley-Levin — they would be fully compliant with the requirements of Merkley-Levin. Virtually all prop trades would fit legitimately under one of the categories of "permitted activities." It would not be "an abuse of [a] permitted activity" — it would be exactly what Merkley-Levin contemplates, and in fact codifies. And that's precisely the problem.





So yes, Merkley-Levin is still a joke. I have quite a bit of experience in this area, and I guarantee that if the Merkley-Levin language makes it into the conference report, Wall Street will shred it, and continue prop trading just as before. Fighting for the Merkley-Levin language does not make you "tough on Wall Street." It makes you naïve.