As Banks Win, We Lose Twice:The Urgent Need for a Tough Volcker Rule

As lawmakers return from recess next week to begin working on merging bills relating to financial reform legislation passed by the House and Senate, the bank holding companies -- the likes of Morgan Stanley, JP Morgan Chase, and Goldman Sachs -- are fighting tooth and nail to water down a key provision known as the Volcker Rule. Congress' financial reform legislation, the 'Wall Street Bill,' would in effect prohibit banks from proprietary trading (that is trading for their own account, owning hedge funds or private equity firms).

This provision would be a key measure in any significant bank reform. First, it would prohibit banks from playing casino with federally insured depositors money as well as virtually cost-free subsidized money made available through Fed programs. That money is being used in large measure to place outright bets on the direction of myriad markets and commodities, which serve little or no banking function.

Second, having access to these vast pools of liquidity through their banking status, their proprietary activity results in consumers everywhere paying up for end products that have these commodities or financial instruments as the cost base for downstream products at the consumer level (i.e. crude oil and the price of gasoline). We pay more while the banks profit handsomely from these distortions.

As but one example the price and market for oil has been seriously distorted by banks becoming oil traders with their access to near limitless liquidity resulting in price spikes caused in large measure by their trading activities on the commodity exchanges. It has and continues to permit them to purchase millions of barrels of oil, pulling them off the market and holding them in limbo for months at a time stored in supertankers at sea. Oil that, had it not been purchased and stored, would under normal market conditions of supply and demand, have forced down the price of oil to everyone's benefit other than oil producers and the banks themselves. There is a whole range of commodities and derivatives where similar distortions apply.

As things now stand we subsidize the banks with their access to federally insured deposits that are put at great risk by their proprietary trading and by giving them an additional kicker in making funding available at virtually no cost to them while others would have to pay at going interest rates. Altogether, a subsidy to the banks at taxpayer expense. And then, in turn, we pay more for the goods and services whose prices have been strongly impacted by their gambles on ever higher prices with virtually cost free funding. They must take us for fools, which sadly we are.

The lobbyists for the banks are certainly working overtime and it remains to be seen how steadfast or pliable our elected officials are in the face of this moneyed offensive. Goldman Sachs, for one, given its connection to all things Washington, seems to have the pulse of the bill's outcome and its structure. Barely three weeks ago their commodity trading division, J. Aron & Co. purchased the gas trading operations, not the production operations, of Nexen Energy. Nexen's trading operations are among the ten largest gas trading operations on the continent, a company that buys and sells some 6 billion cubic feet of gas a day and manages some 50 billion cubic feet of gas storage capacity.

Disconcertingly, the company is located in Calgary, Canada, once home of that other venture into gas trading, Amaranth LLC. Amaranth collapsed spectacularly in 2006 losing more than $6 billion. But hey, that was their and their creditors' money. Were the same now to come to pass with Nexen, much of it would be ours.