When historians look back at the financial crisis of 2008 and the Great Recession that followed, they will fix their blame, in part, on the invention of complicated financial products that hid massive risks and spread them throughout the economy. They will record how Wall Street chased short-term gains at the expense of functioning markets, long-term economic stability and the well-being of the financial institutions themselves.
Those future historians will also look at how the government responded to the mess. They will examine whether members of Congress took the serious steps needed to avoid another crisis. The votes taken in the Senate this week will be crucial in determining the answer.
The high-risk trading of these complex and opaque instruments with a firm's own money -- and not on behalf of a client or investor -- is known as "proprietary trading." This trading became an increasingly large share of the business of Wall Street in the last decade. But when those gambles went south, the financial fortresses on Wall Street crumbled, and taxpayers were stuck paying a $700 billion bailout for the bad bets because pension funds, educational institutions, endowments and other institutions would have been severely damaged in the process.
It was no accident that these firms have increasingly focused on trading for their own account instead of serving their clients. The huge amounts of information and capital they control gives them advantages in betting on market trends. There is a lot more money to make if those bets pan out than by simply serving their clients. Of course, as we all have learned, the bets don't always pan out and this strategy carries huge risk.
The increasing reliance on high-risk trading to drive profits also creates enormous conflicts of interest between a big firm and its own clients. As the Senate Permanent Subcommittee on Investigations uncovered, Goldman Sachs traders made huge sums betting on the collapse of mortgage-backed securities that Goldman itself had created and sold to its customers. It's as if Goldman built and sold a car with no brakes and then took out life insurance on the new owner.
Even in the absence of a spectacular collapse, the focus on proprietary trading damages families and businesses. Every dollar spent on trading is a dollar not lent on Main Street. We need our banks to return to the primary business of making loans to businesses and consumers who can get our economy rolling, not operating their own trading desks.
This week we have the chance to address the problems caused by these hazardous investments in three ways. The Merkley-Levin amendment restores the wall that keeps high-risk investing out of commercial lending banks. It requires greater capital requirements at investment banks to protect against losses. And finally, it eliminates conflicts of interest, such as those we saw with Goldman Sachs, in which bankers package and sell a security, and then bet against it.
We can enact these common-sense rules of the road, while preserving the flexibility that financial firms need to conduct business. But we can only do it if Americans tell their senators loud and clear that it is time for a change.
Wall Street opposition to reform is no surprise -- the old system worked out pretty well for them. In the short-term, they made profits through risky bets. When those bets went bad, they were bailed out.
Thus, there is little downside for banks in keeping the existing rules on Wall Street.
But there is huge downside for Americans. We have barely begun to recover the jobs and savings that were lost. History can't be allowed to repeat itself.
The vote this week will answer a critical question: is Congress on the side of the American worker who lost so much in the Great Recession or is it on the side of the Wall Street firms that put all of us at risk?
We need every American to make their voice heard and send a message loud and clear: the days of Wall Street recklessly betting against our futures are over.
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