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Financial reform debate begins with a familiar target: Goldman Sachs

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An amendment he's proposing offers a window into the complex debates that could reshape the financial reform bill in coming days. The goal of the amendment is partly to plug perceived ethical gaps on Wall Street. But it's also intended to make the financial system safer, by reducing the risks that large financial firms take on in their effort to make profits.

Although much news coverage of the legislation has focused on debate over whether the current bill goes too far, this case exemplifies the other side of the coin. Many Senators believe the bill needs to become tougher on banks and Wall Street firms.

Sen. Jeff Merkley (D) of Oregon, a co-sponsor of the amendment, told a press briefing Thursday that he and Levin are starting to enlist support across party lines, and that some Republicans share his concerns about proprietary trading.

'Not liberal or conservative'

"This is not a liberal or conservative issue," Mr. Merkley said. "The integrity of the Wall Street system of allocating capital is a pro-business position."

Even if it may be pro-business, however, the idea must win its way into the bill.

The amendment would bar traditional banks and their parent companies – focused on deposit-taking and lending – from proprietary trading. It would also call on regulators to set tighter safety standards for non-banks that engage in such trading.

If an institution is large and "systemically important," like Goldman Sachs, it would need to set aside more capital as a cushion against the risks of its trading.

The measure also seeks to reduce conflicts of interest. "If you are designing securities and you are selling them, [you can't be] betting against them," Merkley said, adding that the Goldman hearing this week put that problem in a "spectacular spotlight."

At the hearing, Goldman executives repeatedly sought to distinguish their role as a "market maker," distributing investments to clients, from their trading activities. CEO Lloyd Blankfein and others said clients of Goldman as a market maker do not expect the firm to disclose its view of the securities' quality.

The firm also rejected the characterization that it had a massive bet that the housing market would crash in 2007, saying it had many "long" investments in mortgages that balanced against its "short" positions.

Many banks oppose a ban on proprietary trading, since trading in their own investment funds is an added profit source alongside their other activities.

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