Mark Thoma alerted me to the difficulties in regulating proprietary trading. What confused me a little was the fact that the post does not say what the differences are between the Volcker rule and the Merkley-Levin amendment:
The Volcker Rule, if you'll recall, is a ban on proprietary trading at banks and bank holding companies (BHCs). If you ask Merkley and Levin's offices, they'd no doubt tell you that their amendment significantly strengthens the existing Volcker Rule language in the Dodd bill (Section 619 of S.3712). Don't be fooled — it does nothing of the sort. I spent the majority of my career as a lawyer for a big investment bank, and my first thought after reading Merkley-Levin was: "Wow, this would be cake to get around." Wall Street is scared of the Volcker Rule, but believe me, they're not scared of Merkley-Levin.
What I did learn from the post was that under Merkley-Levin BHCs are allowed to trade as market makers just not on a proprietary basis. This aspect simply allows banks to try to hide proprietary trades under market making trades which seems to be the start of another shadow finance sector.
Like Mark Thoma, I'm not too convinced that this cannot be regulated but it's always a problem that when we hire a watchdog we also have to hire a watcher to watch the watchdog and so on. Perhaps we should allow competition in regulation - keep the disparate non-performing agencies that we have now and allow them to compete in regulation. To motivate the agencies, let the winner keeps the spoils. The fines or settlement go to the budget of the winning agency