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GAO Report on Proprietary Trading Called 'Major Disappointment'

Two Democratic senators have taken the Government Accountability Office (GAO) to task for failing to capture the extent of proprietary trading by banks, an oversight that they claim will make it difficult for regulators and policy makers to implement restrictions on proprietary trading, including trading of energy commodities.

"The GAO study adopts an exceedingly narrow approach to the problem, fails to collect and analyze the relevant data and, as a result, is unable to fulfill its mandate or meaningfully aid policy makers and regulators in implementing the restrictions on proprietary trading and conflicts of interest. Accordingly we [Sens. Jeffrey Merkley D-OR and Carl Levin D-MI] urge you to re-examine the statutory mandate and use its authorities to complete its study pursuant to its mandate," the two senators wrote in a letter to GAO Comptroller General Gene L. Dodaro.

The report "is a major disappointment. At best it is incomplete. At worst it is misleading," Merkley said. "This study was required by legislative statute as part of the Dodd-Frank financial reform bill. We worked with GAO to make it clear that it should look into proprietary trading in all of its facets."

But "rather than follow the statutory directions, GAO has examined in detail only proprietary trading which occurs in distinct 'stand-alone' proprietary trading desks and gave only passing consideration to the risks and conflicts of interest associated with proprietary trading more broadly," Merkley said. Proprietary trading restrictions, which are included in the Dodd-Frank law, prohibit a bank or an institution that owns a bank from engaging in proprietary trading, including the trading of energy commodities.

In its report, which was released Wednesday, the GAO "determined that collecting information on activities other than at stand-alone proprietary trading desks was not feasible because the firms did not separately maintain records on such activities." As a result, it said it did not analyze data on broader proprietary trading activity but analyzed data on stand-alone proprietary trading at the six largest U.S. bank holding companies from June 2008 through December 2010: Bank of America Corp., Citigroup Inc., The Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co.

"Compared to these firms' overall revenues, their stand-alone proprietary trading generally produced small revenues in most quarters and some larger losses during the financial crisis. In 13 quarters during this period, stand-alone proprietary trading produced revenues of $15.6 billion -- 3.1% or less of the firms' combined quarterly revenues from all activities," the GAO report said.

"But in the five quarters during the financial crisis, these firms lost a combined $15.8 billion from stand-alone proprietary trading, resulting in an overall loss from such activities over the 4.5-year period of about $221 million. However, one of the six firms was responsible for both the largest quarterly revenue at any single firm of $1.2 billion and two of the largest single-firm quarterly losses of $8.7 billion and $1.9 billion."

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