GAO Report On Proprietary Trading Slammed By Senate Democrats As 'Misleading'

A new government report on banks' controversial practice of trading and investing for their own profit was condemned Wednesday by congressional Democrats who called the practice "woefully incomplete" and "misleading," adding that it failed to reckon with the risks to the broader financial system.

The Volcker Rule, which required banks to sell off their operations that engaged in this so-called proprietary trading, was one of the most contentious elements of financial regulatory reform last year. Proponents argued that the rule was necessary to prevent banks from profiting at the expense of their customers and, ultimately, American taxpayers who stepped in when their complex bets on mortgages went bad. Banks complained that the rule would hurt their profits, while at the same time arguing that the extent of such speculation was not big enough to pose a risk to the financial system. The Government Accountability Office was brought in as something of a referee, commissioned to conduct a study to assess the true extent of such trading practices and whether losses in that area can contribute to the instability of financial institutions.

The GAO report released Wednesday appeared to give ammunition to Wall Street by concluding that such trading only constitutes a small share of its revenue and, thus, does not present much of a risk to the financial system. Critics, including the primary authors of the provisions that limit such activity, countered that the study was flawed because it failed to grapple with the full extent of banks' trading. The report could lead to momentum against enforcing the Volcker rule.

Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) sent a strongly worded letter to the GAO, criticizing the auditor for not looking at the full scope of proprietary trading operations. The report was "woefully incomplete," said the pair because it only collected data from the six largest banks' stand-alone units, where only a fraction of such trading occurs, rather than from across all bank divisions.

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Source: Huffington