Three and half years have passed, and the so-called Volcker Rule—which embodies some of the restrictions on banks that its namesake sought—is finally becoming a reality. In 2010, a bare-bones version of Volcker’s proposal was included in the Dodd-Frank financial-reform act. There then followed a seemingly endless process, in which the regulatory agencies sought comments from interested parties, and haggled internally, about how the rule should work in practice. On Tuesday, finally, the Securities and Exchange Commission, the Fed, and three other agencies voted to enact a seventy-one-page version of the regulation, which big banks like JPMorgan Chase, Bank of America, and Goldman Sachs will have to abide by. (...)
Having watched the saga unfold over the past four years—it was in late 2009 that Volcker first made his case to President Obama—I have mixed feelings about the outcome. On the one hand, it is encouraging to see the government reaffirming the basic principle that Volcker espoused. The trading desks of the big banks, in placing big bets on market movements, have been doing something that is far removed from the traditional role of commercial banks: lending to businesses and consumers, and helping clients manage risk. Even the most artful defenders of Wall Street have yet to come up with a convincing explanation for why these proprietary trading activities should benefit from a government safety net.
After such a prolonged delay, it is also reassuring that the political and regulatory system has, finally, reached a resolution. Once the financial lobby realized it couldn’t win the over-all intellectual argument, it settled on a policy of stalling and prevarication, hiring consultants and eminent professors to bombard the regulators with lengthy briefs defending the bank’s activities on an individual basis. At the same time, the banks pushed the regulators to spend several more years gathering information before they actually did anything. (...)
If you spend some time reading the new rule and the nine-hundred-page background paper that the regulators provided, you will find a number of weaknesses in the new regime that the banks will surely seek to exploit.
The ban on proprietary trading still contains a great number of exemptions. It doesn’t apply to government bonds, including those issued by the federal mortgage agencies and by municipalities. If Goldman or Morgan Stanley want to short Treasury securities, or the city of Chicago, they can go right ahead. Also excluded from the restrictions are physical commodities, such as oil and gold, and spot foreign-exchange contracts. (Cue loud cheers on the commodity trading and FX desks at places like Citi and JPMorgan.)
There are also exemptions for market-making, in which the banks build up sizable positions in all sorts of securities, supposedly with the sole intention of having enough on hand to meet the demands of clients and for hedging risks taken elsewhere in the firm. But how can any outsider know whether a given trading desk is buying tech stocks, for example, to anticipate customer demand or to wager on the Nasdaq going up? The new rule fudges the issue, saying banks can build up positions to meet “the reasonably expected near-term demands of clients, customers, or counterparties.” What does “reasonably expected” mean? Your guess is a good as mine.
Having watched the saga unfold over the past four years—it was in late 2009 that Volcker first made his case to President Obama—I have mixed feelings about the outcome. On the one hand, it is encouraging to see the government reaffirming the basic principle that Volcker espoused. The trading desks of the big banks, in placing big bets on market movements, have been doing something that is far removed from the traditional role of commercial banks: lending to businesses and consumers, and helping clients manage risk. Even the most artful defenders of Wall Street have yet to come up with a convincing explanation for why these proprietary trading activities should benefit from a government safety net.After such a prolonged delay, it is also reassuring that the political and regulatory system has, finally, reached a resolution. Once the financial lobby realized it couldn’t win the over-all intellectual argument, it settled on a policy of stalling and prevarication, hiring consultants and eminent professors to bombard the regulators with lengthy briefs defending the bank’s activities on an individual basis. At the same time, the banks pushed the regulators to spend several more years gathering information before they actually did anything. (...)
If you spend some time reading the new rule and the nine-hundred-page background paper that the regulators provided, you will find a number of weaknesses in the new regime that the banks will surely seek to exploit.
The ban on proprietary trading still contains a great number of exemptions. It doesn’t apply to government bonds, including those issued by the federal mortgage agencies and by municipalities. If Goldman or Morgan Stanley want to short Treasury securities, or the city of Chicago, they can go right ahead. Also excluded from the restrictions are physical commodities, such as oil and gold, and spot foreign-exchange contracts. (Cue loud cheers on the commodity trading and FX desks at places like Citi and JPMorgan.)
There are also exemptions for market-making, in which the banks build up sizable positions in all sorts of securities, supposedly with the sole intention of having enough on hand to meet the demands of clients and for hedging risks taken elsewhere in the firm. But how can any outsider know whether a given trading desk is buying tech stocks, for example, to anticipate customer demand or to wager on the Nasdaq going up? The new rule fudges the issue, saying banks can build up positions to meet “the reasonably expected near-term demands of clients, customers, or counterparties.” What does “reasonably expected” mean? Your guess is a good as mine.
by John Cassidy, New Yorker | Read more:
Image: Joshua Roberts/Bloomberg/Getty
