By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
It will come as no surprise to regular readers that the banksters are in the process of successfully pressuring the Trump administration to weaken the existing financial regulatory regime– including the tepid Dodd-Frank reforms (for further details, see this post, Financial Regulatory Rollback Proceeds).
One new front that’s been opened in that war: rolling back the Volcker Rule’s limits on bank proprietary trading– an initiative that has caused the Office of the Comptroller of the Currency’s (OCC) to initiate a request for comments on the Volcker Rule. Occupy the SEC submitted a letter on 20 September in response to that request for comments.
To recap a bit of the Volcker Rule’s history: the previous administration shamelessly exploited former chair of the SEC Paul Volcker as it sought to construct a regulatory regime in response to the great financial crisis. After much smoke and mirrors shenanigans, the ultimate result was the overly-complex, deeply compromised 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
One significant part of that reform was the highly-touted Volcker Rule ban on bank proprietary trading– a measure to prevent banks, e.g. the Too Big to Fail Bank behemoths bailed out at taxpayer expense– from gambling with other people’s money.
Now, my vices (currently) don’t run to gambling. But absent regulatory and legal constraints, I can understand why the allure to take a flutter on the ponies– or a long-term complex derivatives bet on some abstruse relationship of the dollar to the yen at some future point in time– might be irresistible to some. These include those traders who sit on the trading floors of financial institutions (and have, I might add, as I well remember from my days trading derivatives, budgets to meet: meaning a certain profit target to hit if one wanted to continue to warm that seat.)
Volcker Rule: Regulatory History
Permit me to quote from Occupy the SEC’s press release briefly summarising the Volcker Rules’s history:
The Volcker Rule was passed as part of the Dodd Frank Act of 2010 in order to help avert another financial crisis similar to the Great Recession of 2008. That crisis was caused in large part by excessive bank speculation in trading markets, and the Volcker Rule seeks to reduce the risk associated with these activities by prohibiting proprietary trading by government-backstopped banks.
In October 2011, five federal agencies, including the OCC, issued proposed regulations implementing the Volcker Rule. In February 2012, OSEC issued a 325 page comment letter to the banking regulators urging vigorous and robust implementation of the Volcker Rule. OSEC also issued letters to members of Congress in the summer of 2012 during the government’s investigation into JP Morgan’s “London Whale” $6 billion trading loss, which could have been averted with a strongly enforced Volcker Rule. In February 2013, OSEC filed a lawsuit against the above-mentioned financial regulators and the Department of Treasury for their delay in implementing the Volcker Rule, which by Congressional mandate should have been finalized by October 2011. Finally, in December 2013, the regulators issued a Final Rule implementing the Volcker Rule.
Unfortunately, the story did not end there. The Final Rule became effective April 1, 2014, and banks were given until at least July 21, 2015 to conform their activities to the Rule. Till today, certain components of the Rule have still not been implemented due to various regulatory extensions issued in favor of the banking industry.
Banks Are Not Your Buddies: Public Benefits of Vigorous Implementation of Volcker Rule
Now, in the interest of keeping this post manageable in length– and of interest to readers with only a cursory background in finance– I’m only going to focus on one of the many excellent made in Occupy SEC’s letter. In addition to linking to this above, I’ve embedded the full below.
This is on the distributional consequences of weakening or strengthening the Volcker Rule– and by that I mean, who will win, or who will lose, by such outcomes.
The letter makes several other points, and I encourage readers with a finance background to read it to go straight to the source rather than rely on my summary alone. And, for that matter, since the language is clear and the presentation brief, I I think others with an interest but without a heavy technical background should certainly give it a go.
Why? Well, this point warrants emphasis:
It is clear that the OCC’s Notice has been issued as the result of the inordinate influence of the financial services lobby on regulatory initiatives at the agency. In the Notice, the OCC takes cognizance of numerous industry comments proclaiming that the Volcker Rule will harm the financial markets and suffocate market “liquidity.” These commentators suffer from what Keynes referred to as the “fetish of liquidity,” that most “anti-social maxim of orthodox finance.”Instead of considering the Volcker Rule’s impact on levels of employment, output or growth in all markets, such commentators primarily focus their analysis on the potential impacts of the Rule on short-term bank profitability. In doing so, they gloss over the numerous benefits to be reaped from vigorous implementation of the Volcker Rule (citations omitted).
What Happens When Banks “Win”: The Public Gets Fleeced
My opposition to the previous administration’s rhetorical gambits and policy shortcomings is sincere and long-standing (see Don’t Be An Obamamometer: Support Naked Capitalism and Critical Thinking). And I’m not the only one who has seen the previous administrations failure as creating the conditions for the presidency of Donald Trump.
The basic problem I’ve had for a couple of decades with the whole emphasis on getting to yes in politics is that it is fundamentally impossible for everyone to benefit. Someone will always win, and others lose, when we make basic political and regulatory choices. Over the course of the last thirty years– and especially, the last decade or so– the whole neoliberal project has decimated the middle class. But one should never, ever forget, that has been as a result of conscious political decisions, rather than some ineluctable historical process, one with no agency, or indeed, capacity for the public, to shift or change the possible outcome.
Please, let us never forget: one of both the big causes– as well as beneficiaries– of this trend had been Big Finance. Those same matters of the universe who caused the great financial crisis–and the ensuing and continuing immiseration of the middle class (not to mention, the poor).
Now, what does that mean in the context of the Volcker Rule?
Over to Occupy the SEC:
Many of the Volcker Rule’s liquidity costs occur in the form a zero-sum game, wherein a banking entity’s “cost” serves as a benefit to depositors and the public in general. While the Volcker Rule may reduce banking profits resulting from proprietary trading, such lost profits are not unanticipated “costs,” but rather benefits that form the crux of Dodd-Frank Section 619’s intended regulatory effect.
Proprietary trading by a government-backstopped bank involves the distinct possibility of the bank needing to be bailed out, whether through depositors’ funds, Federal Reserve financing, or taxpayer subsidies. The costs associated with these forms of bailout must be included in the equation when considering the economic impact of the Volcker Rule. Thus, to the extent that banks face costs from their compliance obligations or from lost proprietary trading profits, depositors and the public are concomitantly saved the externality costs of potential bailouts.
An undiluted version of the Volcker Rule’s ban on “proprietary trading” by banking entities would reduce the risk of bank failure, as only the most basic, customer-focused trades could make it through the Rule’s gauntlet. This outcome would increase both depositor and investor confidence in banking entities, which in turn would increase real liquidity in the banking industry, and as a consequence, the overall market for credit. Increases in real liquidity would drive down real interest rates, improve consumption and help the global economy enjoy a sustained recovery.
What Needs to Be Done
The above passage suggest to me that what we need to focus on next is to strengthen– rather than further neuter– the existing financial regulatory regime so that US taxpayers would never again be on the hook for another financial industry bailout. Okay, I recognize that my “never again” rhetorical touch is a bit ambitious, as memories will ultimately fade as to the havoc an untrammelled finance sector can create. And as a longstanding student of politics, I do grasp that politicians are always open to being compromised. Please also remember that it was not the nasty Republicans who dismantled the Glass-Steagall framework but neoliberal Democrats– I’m looking at you, Bill Clinton, Bob Rubin, Larry Summers.
In that spirit, the Occupy SEC suggestions are a modest step in the right direction. And I therefore encourage interested readers to look at them more closely and in full.
But before that, Over to the Occupy SEC for the last word, exhorting the OCC to enforce the existing rule, rather than try to rollback and revisit the results of an extensive, threee year rule-making process:
We believe that the current Final Rule already contains sufficient exclusions and exemptions from the proprietary trading prohibition. We commend the OCC for its solicitude in assuring that the existing proprietary trading provisions clearly delineate the line between permissible and impermissible activities. However, it should be noted that the OCC and the other Volcker regulators were given ample opportunity to define the contours of the regulations implementing Section 619. The rule finalization process took over three years, well in excess of the deadline established by Congress.
Millions of lobbying dollars were spent by industry participants to cajole the Agencies into favorable interpretations. Thousands of commentators, comprised of individuals, groups, companies and governments opined on various aspects of the Volcker Rule, including exemptions, market realities, and trends. The Agencies expended considerable manpower and government resources to consider these comments. In short, the Volcker Rule was finalized after much deliberation. The OCC’s issuance of the instant notice for comment is akin to reopening Pandora’s box.
The OCC and the other Volcker-enforcing agencies should now focus on enforcing the Rule rather than on constantly seeking new opportunities to refine and complicate an already-complex law. Many years after it became law (technically going into effect on July 21, 2012 by virtue of 12 U.S.C. § 1851(c)(1)(B)), the Volcker Rule remains a largely unenforced one. Only one major bank, Deutsche Bank, has been penalized for Volcker non-compliance. And even in that case, the assessment was a paltry $19.7 million. Rather than habitually kow-towing to industry efforts to gut the Volcker Rule, the OCC should set its sight on actual enforcement of what is now a well-established law (my emphasis).