Volcker Rule Ends Speculation, Creates Speculation
Of all the hundreds of rules passed to prevent another financial crisis, the one regulators begin unveiling today is perhaps the most feared by the banks. As envisioned by the eponymous former Fed Chairman, the Volcker Rule was supposed to stop them from gambling with their clients’ money. It’s the closest thing to a reinstatement of the famous Glass-Steagall Act, which separated commercial and investment banking from 1932 until it was repealed in 1999. But the draft rule’s hundreds of pages suggest that reality is a bit more complicated.
“The first principle of banking lobbying is you do not want it in legislation,” Das told us. “You want a framework and then you can move everything into smoke filled rooms and committees.”
To that end, Das says the banking lobbyists succeeded: Instead of spelling out exactly how the Volcker Rule would work, lawmakers left the details up to the regulatory agencies. Once the regulators began their work, lobbyists began, as Das put it, “educating” the regulators. This explains the rule’s delay — it’s been a year and a half since the initiating legislation — and also its transformation.
Das feared the result would be exceptions you could drive a casino through. Take “market making.” The idea is that for markets to run smoothly, if a bank can’t find someone to take on the other side of a deal for a client, it may need to (temporarily) take it on itself. But how can you tell if they’re doing the deal for the client or for themselves? Das quoted a derivatives lawyer he knew as saying, “Look, there are so many exceptions here I’d be embarrassed if I couldn’t excuse all your proprietary trading or speculative activity.”
The rules emerging this week are only drafts, and early reports suggest the banks are going to continue to push for wider latitude. We’ll be looking to see to what extent the final Volcker Rule ends all “essentially speculative activity” by banks, as Paul Volcker hoped — and we’ll be speculating about what will change as the rules are further revised.
Photo: Erik Kurtz
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