Journalism in the Public Interest

Regulators Weaken Dodd-Frank Draft Regs, Allow More Risk

The regulatory agencies in charge of finalizing some of the most controversial rules mandated by the financial reform law are leaning toward making them looser and more favorable to banks and other traders, according to recent reports in the financial press.

As we noted in June, federal regulators were still puzzling over how restrictive the ban on proprietary trading—banks trading on their own behalf—should be, given that banks are still allowed to hedge against risks. The Office of the Comptroller of the Currency has argued for banks to be given more leeway in what types of trades would be permitted as hedges under the rule, but critics charge that banks could use the opportunity to take more risks rather than hedge against them. 

A draft version of the so-called “Volcker rule” suggests that the ban has been significantly watered down. Here’s the Wall Street Journal:

[The language] opens the door for banks to make all manner of bets on the market, observers said, because a bank might define the risk to its portfolio broadly, such as the risk of a U.S. recession.

If the language is confirmed in the final rule, expected by late October, it would be a victory for Wall Street firms that have lobbied to relax the ban on proprietary trading.

Meanwhile, the federal Commodity Futures Trading Commission has drafted a final rule that reportedly backs down on other key provisions intended to limit excessive speculation by large banks and commodities players. Reuters reports:

The CFTC's final rule maintains that the Dodd-Frank Wall Street overhaul law requires position limits -- caps on the total number of commodity-linked contracts that any one trader can hold -- to prevent excessive speculation in oil, grain, silver and other commodity markets.

… But in the details of the plan, the CFTC modified key areas that were a major concern for big Wall Street banks like Morgan Stanley and oil companies such as Shell.

In an earlier draft of the rule, the agency had essentially proposed that all the trading positions of a company be added up and that the total be subjected to the position limits, thereby limiting a company’s overall bet on a commodity. 

But the latest version, according to Reuters, allows the limits to be applied to individual trading desks within large companies, provided they trade independently. This could allow banks and other companies to accumulate far larger totals of commodity-linked contracts.

The CFTC’s rule is already months behind schedule, and its writing has been particularly contentious and hampered by internal disagreement on the commission. Nonetheless, MarketWatch reports that a vote is expected on the final draft in the coming weeks

Gasp!  Who could have seen this coming?

It’s worth pointing out, by the way, that all the regulation in the world is just for show, here.  The Volcker Rule more or less says that you can’t insure against assets you purchased knowing they’d fail.  The positional limit idea is that you can’t buy more futures than exist of a commodity.

The rules don’t matter, because both of these are illegal, and usually referred to as “fraud.”  But the law doesn’t apply to banks.  The OCC comes flying to the rescue to defend the poor banks against, y’know, law and order.

And the CFTC is about as aggressive as you’d expect a panel of big-time traders to be, and since they come from a similar background, surely have all the ethical standards of an upright citizen like former NASDAQ president Bernie Madoff.

Why doesn’t it surprise me that rules will favor banks and other large financial institutions? Though the regulators are career civil servants, they are taking their point of view from somewhere.  Doesn’t seem to change much no matter which party sits in the ‘big chair.’

Stephanie Palmer

Sep. 22, 2011, 5:50 p.m.

I know that we pay the salaries of these “regulators.” Someone must be paying them something extra. I wonder who it is.  We already know what will happen if we don’t forcefully regulate the financial institutions. They will gobble up what’s left of the money and we will all be in the bread line. They are thieves. The only problem that I can see right now is that not one of them is in prison.  And yet they almost took down the world’s economy.

Nothing new here, since Wall Street, SEC, FED, CFTC are in bed and lobbyist are paying off the fringe. The Banks will continue as they have to not back up their risk and fail, ‘The Warning’ about CFTC and Brooksley Born is ‘born’ our in this article again. Also did the regulators—lol- actually ask or maybe they were asked by Wall Street to ask them…anyway Wall Street wrote the guidles for these regulations(convoluted yes but hey, again, its Wall Street). We all know how upright and honest Wall Street has been, so how could we doubt their ‘goodwill’ in this regard.( said very tongue in cheek). Also per “Griftopia” and other press releases why did the CFTC provide ‘secret’ letters to the likes of Goldman Sachs so they could do what they do in trading commodities—speicial privledges (Why)? Senator Levin’s committee looked into it and what has been the outcome of that?
Also why was Greenspan allowed to use his ‘insider’ information to use that in his company in and outside of Washington and better his own bottom line along with that of his clients? Is their a time limit on any of these crooks facting trials?

Richard Isacoff

Sep. 22, 2011, 7:32 p.m.

Perhaps one of the biggest problems is semantics. The term “Bank” has changed its meaning to everyone just in 3 yeras. Wall Street knew about the change, but few outside of the world of finance knew the “Bank” no longer meant a place to deposit money, open a checking account, get a CD, maybe apply for a mortgage or car loan etc.

Today, “Banks” are multi-purpose one stop shopping financial institutions. It’s like the Wild West. Banks should not be able to trade on their on account beyond a pre-determined % of capital; they should not be able to securitize loans; they should not be able to run hedge funds; they should not be able to do whatever they please. Glass-Steagall of the pre-1990s may have been too restrictive but now there is no separation at all of any financial transactional/investment/“gambling” business.

I guess its like any other business that wants to run a monopoly for control reasons. Unfortunately our economy doesn’t work predictably enough for there not to be bumps. In 2007-2008 “BANKS” hit a brick wall. We are all still bleeding

An implicit assumption of the banking officials and those of associated financial institutions in advocating for the “looser standards” is that, in the event of another spectacular disaster, the US Government will (again) bail their companies out.  This assumption is divorced from the reality of popular sentiment, especially as manifest in the Republican Party.  There is almost zero prospect for another cash infusion, so a mis-step this time will have catastrophic consequences for the economy.  Naturally, there will be little in the way of personal risk to high-ranking corporate officials and no appetite for the self-serving members of the current (or future) administrations to pursue them.  So, this is a rational move by the banks…but an unseemly (although expected) capitulation by the “regulatory” agencies.

All great comments above, save one. I don’t believe the Republican party would be any less inclined to bail out their friends again. I seem to recall the most recent occasion began during a Republican administration. Self-serving politics is non-partisan.

I wonder if Wall Street, banks, federal regulators and our supposed representatives in Congress realize people are marching on Wall Street and protesting at banks?  I wonder if they realize just how angry Americans are as they see thier hard-earned money being stolen by the financial industry with the spoils going straight to the wealthiest in the world?  They had all better get smart quick and Americans had better get their money out of Wall Street because what is happening is crimanal and needs to be stopped.

Keith, I think you miss the point about “popular sentiment”:  It pales in comparison to anybody who can turn the lights off.

Think about who always gets their way.  Defying the energy companies means no transportation or lights.  Defying the banks means no paycheck or pension.  Defying Hollywood means no help in reelection and possibly a subtle smear campaign.  Defying pharmaceutical companies…uhm…how DO they get on this list, exactly?

It’s a shame, with all the rhetoric about the possibility of “home-grown terrorists,” we can’t turn any of that on the people in this country who are genuinely trying to terrorize us.

Huh…so they’re going to let the banks and Wall Street shaft the other 300 million Americans again?

They have a name for societies wherein organized crime and “the law” are one and the same thing, and it isn’t “civilization”.

There are 2 solutions to this attempt to give the shaft to the little guy. First,require complete disclosure to any customer of a “bank” that the institution is participating in speculation and it must be in print large enough to see without a microscope and second,stop dealing with banks. There are still credit unions which supposedly are owned by the members and if enough of us little guys move out,perhaps they will get the message and just do business with each other!

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