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Why the Volcker Rule is a Cop-Out and a Joke

0 | By Shah Gilani

Right now everyone’s talking about the Volcker Rule.

For heaven’s sake! What’s the big deal? After all is said and done, there is only one real problem with it (and I’ll get to that in a minute)…

The 300-page draft Rule, named after its champion architect, former Federal Reserve chairman and inflation-fighting icon Paul A. Volcker, is an addition to the ever-evolving masterpiece of legislation (yes, I’m being sarcastic) known as the Dodd-Frank Act.

Now, draft SEC rulemaking and regulatory actions are first submitted to the public for “comment.” The SEC collects all comment letters and posts them on their website. (Check out “How to Search for EDGAR Correspondence.”)

Well, wouldn’t you know it, this draft (some might call it “daft”) Volcker Rule has caused a flurry of letter writing; letters were due to the SEC by no later than this past Monday evening.

All in all, this august (not the month) regulatory body received 241 detailed comment letters (that’s a lot of comment letters) and an astounding 14,479 mostly form letters, as well.

Almost all of the form letters to the SEC, many of which were “personalized” by submitters, were strongly in favor of the Volcker Rule and called for strengthening it and not watering it down by allowing any exemptions.

How do I know that? (No, I didn’t read them all.) They resulted from an e-alert campaign to activist supporters of the Americans for Financial Reform group and Public Citizens, who posted appeals on their websites.

Other notable comments in favor of the Rule, and weighing-in in more detail, came from Paul Volcker himself and Senators Carl Levin (D-MI) and Jeff Merkley (D-OR), who championed the Volcker Rule in the Dodd-Frank legislation and in their comments called the draft too “tepid.”

The lengthiest comment letter in favor of the Rule (and of tightening it significantly) came in the form of a 325-page love letter from the Occupy Wall Street movement. That one is well worth a read (posted here, if you’re interested).

However, of those 241 detailed comment letters, most of them came from detractors.

Detractors like individual banks (who normally let their dogs and lobbyists do their biting) and industry groups, such as the Securities Industry and Financial Markets Association (Sifma) and the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

Powerhouse law firm Davis Polk was itself drafted by several banks and Sifma to help draft at least 10 letters on behalf of the cause (“cause” banks want to keep making big bonuses).

Detractors of the Rule warned of dire consequences for American capital markets, American corporations, the American economy, the world, and the universe beyond even our own little constellation, if the Rule is allowed to curtail their most coveted and conscientious shepherding of their clients’ best interests.

Prop Trading and Market Making

The Volcker Rule comes down to this: It stops banks and any other financial institutions that are backstopped by the Fed or the FDIC, generally speaking, taxpayers, from betting on their own behalf.

That’s what proprietary (or “prop”) trading is: betting the house’s money to make outsized gains to enrich the homeboys who are pulling leveraged levers for fun and profit.

There are innumerable arguments against innumerable issues inherent in the lengthy and unwieldy draft Rule.

Yet the biggest issue is what banks will be allowed to do in the “market-making” realm.

Market-making is when a dealer takes a position in anticipation of a customer order, or on behalf of a customer who wants to “work” a position, or any number of other iterations (and there are hundreds) of the market-making functions that dealers perform.

I’m not going to bore you with the realities of market-making, although I am intimately familiar with almost all of them, having been a market-maker on the floor on an exchange, being a registered over-the-counter market-maker, and generally making markets for customers and myself in many different instruments over many years on Wall Street.

Trust me. (Don’t you love it when people say that?)

Market-making involves taking risks.

By its very nature it can, and more often than not does, involve prop trading. So there you go – market-making is prop trading.

There is a lot to comment on regarding the Volcker Rule.

But, the bottom line truth is, for all its good intentions and unintended consequences and all the fear-mongering and vehement griping about the Rule destroying American capitalism and the power of American banks to compete on the world stage, there is only one real problem with the Volcker Rule.

It shouldn’t exist at all.

Why We’re Talking about Volcker in the First Place

The only reason we have to have a Volcker Rule is that our spineless President and his administration – replete with Wall Street holdovers who helped sell America’s soul to the oligopoly of bankers that buy presidents and congressmen and women – didn’t resurrect the Glass-Steagall Act that formerly separated commercial deposit-taking institutions from investment banks who were free to gamble their own (partners, investors, and willing shareholders) capital to their hearts content, because taxpayers were protected.

Glass-Steagall proved itself for more than 40 years.

It was dismembered by a powerful partnership of bankers and politicians to make way for giant “universal” banks that ultimately paved the way for privatized profits and socialized losses.

The problem with the Volcker Rule is that it’s a cop-out.

It’s a travesty of a mockery of a sham that we once had prudent and protective regulations, and that they were eviscerated (where they weren’t eradicated altogether).

Dodd-Frank is a joke.

It’s all about reconstituting most of the regulations that got axed to death under deregulatory regimes championed by Administrations and aiding and abetting Congresses.

Okay, one last note on the subject…

The Volcker Rule will end up being watered down, and then won’t be enforced, and will eventually be overruled – that is, if it isn’t delayed enough (that’s the plan, by the way; that’s why so many industry groups sent in so many long comment letters) so that a new administration this fall has a chance, and Dodd-Frank has no chance.

This would all be kinda funny, if it wasn’t so sickening.

Shah

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