SEC Rule Would Prevent Banks From Profiting While Clients Lose

by Wendy Simmons | September 22, 2011 6:00 am

We are three years post-Lehman, and it appears that while we might have learned nothing[1], the behemoth that is the Dodd-Frank financial reform legislation is starting to take effect.

So perhaps we are starting to learn something.

The Republican presidential candidates clamor for repeal of Dodd-Frank, claiming it is nothing but a ball and chain around the necks of banks[2] that would otherwise be happy to freely lend. Democrats vociferously defend its attempt to force banks to better manage their risks and protect customers.

Buried this week among the back-and-forth over millionaires versus teachers, austerity versus stimulus and Perry versus Romney, a bit more of this regulation is starting to materialize. The Securities and Exchange Commission unanimously passed a rule, required by Dodd-Frank, that will prevent banks from betting against their own products[3].

Democrats claim this is a commonsense fix. After all, we don’t want the big banks up to their old shenanigans[4] of designing instruments to fail. Republicans consider this to be an undue regulatory burden on the banks. Although the newly minted Republican majority in the House has tried hard to delay and defund Dodd-Frank, it does not appear they can run around this particular rule. That’s good news.

Now for the bad news.

Read the fine print, and you will note that the banks will be blocked from betting against their own products for only one year. And there are some exceptions for banks that are “hedging their bets.” So this rule is neither as burdensome as it first appears nor as effective as we might hope. In the end, the house always wins.

  1. learned nothing:
  2. ball and chain around the necks of banks:
  3. prevent banks from betting against their own products:
  4. up to their old shenanigans:

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