Journalism in the Public Interest

How to Kill the Volcker Rule: Just Add Fat

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Last week, it finally became clear that the Volcker Rule is as good as dead.

The Volcker Rule, named after Paul A. Volcker, the former chairman of the Federal Reserve, is meant to ban financial institutions that are protected and subsidized by the federal government from trading for their own account. That is, it's pretty simple: Traders shouldn't speculate for their own personal gain using the money you and I pay in taxes.

Yet bank lobbyists with complicit regulators and legislators took a simple concept and bloated it into a 530-page monstrosity of hopeless complexity and vagueness.

They couldn't kill the rule. Instead, they are getting Congress and regulators to render it morbidly obese and bedridden.

Of course, that's no accident. The biggest banks, which are in business today only because taxpayers bailed them out, want to protect their valuable franchises.

"Most of the length, complexity and questions are in there because of industry lobbying," said Dennis Kelleher, who runs Better Markets, a financial regulatory reform group. The rule is "the bastard child of the lobbying industry," he said. "You can't demand and insist and lobby for all these rules and exemptions and then complain that it's too long and complex."

The banks are making sure the rule stays incapacitated. By Mr. Kelleher's count, of the substantive responses, 13 were pro-reform, compared with 300 from the industry.

The regulators and legislators deserve some sympathy against such an onslaught. But only so much. Responsibility for the gross inadequacy of the Volcker Rule lies with them. They added in the loopholes and exceptions.

Regulators did so out of vanity. They are confident they will be smart enough to navigate all the complexities. Regulators have already testified that they wanted to carry out the rule in a nuanced fashion. They aspire to distinguish intentional proprietary trading from unintentional cases, a standard that is tantamount to pre-emptive surrender. That will make enforcement all but impossible without a trader stupidly putting something incriminating in an email.

Even at this late hour, regulators still have a choice. The final rule isn't in place. They could radically simplify it. The law could merely state that prop trading is illegal at banks backed by the government, and not explain what the inevitable exceptions and exemptions will be. And regulators could make sure to stress, in public pronouncements, that the penalty will be stiff. If regulators carried that through, banks would scream that the sky would fall -- that they wouldn't know what was legal and what wasn't.


What would happen is that regulators and financial houses would settle into a situation where only the most egregious violations would be prosecuted, while most acts that came close to the line would pass through. The result would be exactly the intent of the law: to reduce sharply any truly risky activities because lawyers wouldn't be able to find rationalizations in any of the law's language. The Volcker Rule should be a lean and mean single sentence.

O.K., fantasy time is over.

Second-best is to introduce some bright-line rules into this monstrosity. Then Volcker won't be hostage to whichever heavily lobbied regulators happen to be on staff at any given moment.

As it stands, "it's as if we told the banks to stop speeding and required them to have speedometers," said a Congressional official familiar with the rule-making. "But we didn't set the speed limit."

Occupy the S.E.C., a group of reform supporters that wrote a powerful letter about the flaws and proposed remedies of the rule, urges regulators "not to confuse mere complexity for nuance. Simple bright-line rules make the compliance process easier, both for the regulated and for the regulator."

Yes, bright-line rules set up an arms race between the law firms that figure out ways for banks to comply with the letter but not the spirit of the law, and the government cops that are trying to figure them out. That's a race that government can never win outright. But with some enforcement, regulators could prevent the worst risks.

In all their pages of concerns, what is the anti-Volcker crowd most worried about? Nothing convincing.

Banks and their industry groups have mainly argued that the rule would reduce liquidity, or the ease with which a customer can buy or sell an investment. Less liquidity would raise the cost of capital for those seeking it.

Bogus. There is a surfeit of liquidity on Wall Street. It generates fees and short-term gains but little social worth. It's the opposite of useful. It disappears when most needed, as in the "flash crash" of 2010, thus exacerbating collapses.

Trading has risen inexorably in the last couple of decades, but has that resulted in more companies raising cheaper capital? No. Indeed, Professor Thomas Philippon of New York University has found that the financial sector's costs to society have risen, not fallen, in recent decades.

Banks say the rule will hurt their market-making businesses. But as the Occupy letter points out, market-making is a competitive, profitable business. There is no law of nature that requires banks do it.

Regulators could, if they wanted to, ban all market-making by deposit-taking institutions. The Columbia economist Joseph Stiglitz and Robert Johnson of the Roosevelt Institute wrote in their letter to regulators on the rule, "If absolute simplicity is truly what the industry demands, then the regulator should provide that."

Complex structures and high-risk trading should be eliminated, they argue. The rule, they point out, gives the regulators authority to make "any (their emphasis) limitations or restrictions" they want on trading, which includes banning all trading in securities or derivatives.

Despite the decibel level, the banks' case is weak. As Peter Eavis of The New York Times noted on DealBook, the opposition comment letters substitute dire theoretical predictions for specific real-life examples. Surely, the banks have the data. If the data supported their case, why not trot it out?

The reason is that they didn't have to. They won anyway.

Follow the money! Politicians get campaign bribes from banks and lobbyists, so who do you think will win?

gwen caranchini

Feb. 22, 2012, 12:56 p.m.

We need stomach to stop the big banks and mers.  When are we going to get it?  We need to have a democratic led congress and senate next time and Obama not having to run for a second term has got to “put it to them” otherwise we are headed for another fall and maybe this time we can take out the big banks once and for all.

Barbara Flores

Feb. 22, 2012, 1:23 p.m.

We have a president who lacks audacity, who fears bold moves unless it can be done through a drone attack, who dragged his fellow Democrats through the Affordable Health Care Act and destroyed their confidence in him. I have read that Obama received more money from Wall Street than McCain. He sure acts like it. No leadership, no change and really no hope in our government.

“When plunder becomes a way of life for a group of men, they create for themselves, in the course of time, a legal system that authorizes it, and a moral code that glorifies it.” ~ Frederic Bastiat (political economist, 1850)

Barbara Flores

Feb. 22, 2012, 1:55 p.m.

The quote David sent in is so on target.  That’s why we needed someone who was bold and different.  Too bad we didn’t get that someone.

Please ... name names! 
Pro Publica should identify the “who’s who” of the egregious actions. When a member of Congress and/or a regulator is named - accountability becomes direct.

Rodney Applegate

Feb. 22, 2012, 2:22 p.m.

I am changing all of my accounts to a community bank that is trustworthy.

Although I sort of agree with you Barbara Flores, you have to be realistic, in that, the voters, put in the even more abrasive congress people in office ending any changing of corruption, the Tea Party. Now the GOP feels, that these type of candidates are their future. Certainly horrible turn of events, for all of America. The Voters needs to completely throw out the GOP, if there is any chance of reversing the banking corruption, which will again, destroy many again, and very soon.
All the voters have to do, is WAKE UP and VOTE.
Blaming Obama, just does not put them blame where it belongs…......the voters. We elect our representatives, if they do not represent…....BYE BYE.

We have had a congress made up partly of Democrats in name only, also known as Blue Dog Democrats..

They are the ones that prevented the 60 vote majority in the Senate and compromised really effective legislaton. 

We need to demand tough answers from those Blue Dogs before we vote for them.

Of course we also need to get rid of Tea Party and far right Republicans as well. 

Do everything you can to help, or we’ll wind up back in 1890 again.

Marvin Van Horn

Feb. 22, 2012, 5:03 p.m.


Thanks for discussing this issue here, and showing the incredible complexity of the regulatory rule making which amplifies by 1000s of percent the complexity of any well meaning statutes, like the 72,500 pages of Tax Code. It makes following the law or the regulation almost impossible.  Setting aside whether you feel a bank is evil or good, just imagine that you were being impacted by all this, and you could find a way via lobbying a regulator to exempt yourself, you would naturally do it.

Unless you couldn’t!  US expats are feeling that way right now, as IRS implementation of FATCA and FBAR and Voluntary Disclosure policies for chasing down Whale tax cheats offshore, has so many negative consequences on normal middle class US persons living overseas, who have no influence or money to change the direction of the outcome.

Have you heard of FATCA (passed in 2010 buried in the Hire act) and new IRS regulation that I call DATCA (requiring all US banks report all non resident interest to the IRS) that is turning the US into a pariah around the world?  It is moving us another step towards a dystopian future of interconnected reporting of all financial institutions in the world to the IRS. The extraterritorial reach of the IRS is just stunning.

That might be a subject you would want to dig into a bit, as it doesn’t get much coverage in the US. Google FATCA and FBAR and see what you get.  Try to approach the subject without a bias and see what you make of it. FATCA is a road to hell in search of one good intention.  And no, I am not a banker, tax evader or even rich.

BTW, some of the biggest opposition to the Volker rule (probably due to the 500 pages of complexity) is coming from Canada.  Have you been watching the story up there?  You should.  Check out Isaac Brock .com or check out the Globe story called “Chorus of Canadians blast U.S. Volcker rule”.

I don’t know what it means exactly

So, the banks are bastards?

Is there anyone who can summarize this, for me?

Barbara Flores

Feb. 22, 2012, 9:55 p.m.

I know the Republicans are crazies (too easy a term) but let’s all remember that the Glass-Steagal (sp) act which absolutely separated commercial banks from investment banks since the Depression was overturned during the Clinton administration and signed by that weasel Bill Clinton.  His secretary of the treasury Rubin was from Wall Street, Goldman Sachs I believe, and worked the thing through.  That was the beginning of this terrible crash.  Larry Somers was around then and Obama brought him back along with Geithner. They enabled the banks to thrive when all we needed was for them to survive.  What a tremendous opportunity lost when the banks were the ones over the barrel.

Stephen Jencks

Feb. 22, 2012, 10:43 p.m.

Term Limits on Congress

Jonathan Bonde

Feb. 23, 2012, 9:57 a.m.

You guys blaming Republicans need to wake up and smell the corruption on both sides of the aisle.  This wasn’t caused by the “Evil Rethuglican regime!!!”  This problem has been fostered and cared for by Republican and Democrats alike.  Both sides of the aisle are bought and paid for by many big industries, not just the financial sector.  As a matter of fact, when it comes to corruption in Washington, there is virtually no difference between Republicans and Democrats.  Neither side legislates in the best interests of “We The People” anymore.  Almost all legislation is now crafted and fine tuned by special interest groups determined to carve out exemptions and strengthen their own place in the market place at the detriment of competitors and often the public as well.
  Continuing to blame Republicans and insisting we have to elect Democrats to clean this up will ensure the same malfeasance continues.  Were you to be successful and replace all the Tea Party Republicans the only change would be which side was getting better funded this time around.  What has to happen is a fundamental change of Washington and how the town works.  One of the first things that has to happen is severing the ties between special interest groups and Congress.  And then we need to firmly restore the Rule of Law.
  I am not a political scientist, or an economist, or a journalist, I’m just an IT guy.  But I’ve spent most of my life watching this countries laws slowly drift down into irrelevance.  In my opinion, enacting the following things would right our sinking ship:
  1) Term limits for all members of Congress.  No more life long politicians whose main goal is to stay in office and fund raise constantly to make sure they do.  Their job should be to ensure America is protected by laws working in the best interest of all Americans, not just the few who can make huge campaign contributions.
  2) Tie congressional pay to the average salary of the area they represent.  They must have a vested interest in bringing up the quality of life of their constituents.
  3) Make it illegal for outgoing members of congress to lobby in any way shape or form for 10 years after holding office.  End the revolving door between Congress and K Street.  Same goes for congressional aides.
  4) Strengthen rules regarding lobbying.  Gingrich was a lobbyist.  In a country run by the rule of law he would have suffered consequences of such bald faced lies.  But because the laws are intentionally written so vaguely any talented word smith can get away with lying about such a thing.  Write new lobbying legislation in clear and concise language and attach equally clear consequences for failing to follow the laws. 
  5) Return to a nation of laws, not of men.  This is probably the most important goal in my opinion.  A nation of laws is vital for a vibrant economy.  If a small start up knows that from the beginning the deck is stacked against them by competition in collusion with the law makers, then true free market capitalism is strangled at birth.  We need to return to clearly written legislation with the goal of ensuring a free and open market where competition is encouraged not discouraged and penalized.  And most importantly, we need to establish equally clear CONSEQUENCES for failing to follow the law.  I guarantee you all this mortgage fraud and financial theft that has been going on would stop cold the second we started throwing executives in jail.  But when the consequences for being caught stealing, lying and cheating is a slap on the wrist and a chuckling “well you shouldn’t have gotten caught you rascal you!” then stealing, lying and cheating becomes a way of doing business, with the occasional weak fine attributed when caught as a small cost of doing business.  White collar financial crimes are as dangerous and as damaging as your more traditional crimes of theft and robbery, and they need to be treated in the exact same fashion… Incarceration.

Like I said, I’m an IT guy, but I’m sure if we could make some progress on the 5 points above this country would be restored to greatness, and our capitalist society could thrive again.  One thing I know for sure though, if we continue to just divide ourselves along the Right / Left line and insist everything will be OK if we just get the correct side elected, but we don’t make any other demands, our economy, our laws and our lives will continue to be victimized by the collusion between industry and congress.

You are correct, Jonathan, but only a 100% turnover in November will get us there.

Nothing will change until we have publicly financed elections mandated by a constitutional amendment and done by a constitutional convention, i.e.,  NOT MANDATED BY CONGRESS BUT MANDATED TO CONGRESS - the recipients of the lobby money.  If we continue to blame individuals, i.e., lobbyist, the legislators dependent upon lobby money, the regulators “Captured” by the regulated (to reference the economic theory lost in Dodd-Frank), the bankers, this Democrat or that Republican, we will never get at the real structural problem in our constitution and these discussions only serve as a vehicle to let off our frustrations, which placates and therefore perpetuates the problem. 

Consequently,  I wish all serious people here and elsewhere would read Lawrence Lessig’s book on this subject: Republic, Lost:  How Money Corrupts Congress - and a Plan to Stop It.  This book, especially the last part, is the most well researched, well reasoned, and science based discussion on the corruption caused by legislator’s dependence upon lobby money that I have ever come across in my 34 years of teaching public policy to business graduates and undergraduates.  And maybe most importantly, it is a carefully researched strategy to achieve permanent structural fixes with its on-line organization called Rootstrikers (to strike at the “root” of the problem).

I do not know Lessig, I have no affiliation with this publication, but I was so favorably impressed by this book that I wrote a lengthy review of it, sent him the review, and joined Rootstrikers.  I joined because this new organization seems to be the only effort that avoids the error of blaming the individual actors and focuses on the legal environment that causes the actors to behave the way they do -  and I joined because it is not dedicated to just blowing off steam or randomly lashing out against vague or incorrect targets. If I were not retired from teaching, Lessig’s Republic, Lost would be required reading for all of my Organization and Environment students.

Barbara Flores

Feb. 23, 2012, 10:33 a.m.

Absolutely right, Jonathan.  That is why the almost universal mindless adoration of our current president has been so disheartening. And the reluctance of progressive minded voters to call things out more clearly only perpetuates the problem.
Off the subject of the economy but who in the world was in charge when holy Muslim materials were destroyed in Afghanistan?  I have heard no criticism of this commander in chief.  Suppose this had happened under Bush?  Someone/s must pay the price for that stupid mistake.  Remember when that minister in Florida threatened this action and we were all so fearful of the consequences for those in Afghanistan.  And now it happens by our forces in Afghanistan!  My apologies, I drifted off the subject!

Jesse does such a great job of muckraking. It’s heartbreaking that, as long as we have the best congress money can buy, all we’ll ever get is pandering, posturing, pork barreling and obfuscation (sorry, I couldn’t alliterate the last one).

Jonathan Bonde’s 5 points should be self-evidently valid to an impartial observer (which I am most obviously not), but the stumbling block for each of them and their ilk is that they would all have to be instituted by the same gang of 535 who would be negatively affected by their passage.

I am aware that Congress in the late 1800s was just as corruptible, or maybe even more so. There were references in the newspapers to “The Senator from Steel,” “The Senator from Oil” and other unsubtle appellations. It might be instructive if someone wrote an essay, a blog post or a book comparing the marketability of Congress from then to now (maybe not exactly Jesse’s genre, although I suspect he’d be good at it). It probably wouldn’t cheer up anyone who believes elected officials are looking out for the public good.

Self-interest (unenlightened), anyone?

ConstitutionNotThe Problem

Feb. 23, 2012, 10:45 a.m.


Something I’d like to draw attention to in the article (which, by the way, is one of the best pieces here in a while, especially on the financial side) is that the banks get to sit at the table when they’re being governed.  Actually, they’re on both sides of the table, because the regulators are former (and future, when their terms expire) bankers.

So bankers sit down with bankers to determine what rules the bankers need to follow.

Think about that long and hard, and feel free to ask your Congressman why nobody asks us if the NSA can record our phone calls (as long as the call has a connection outside the country) or if we should be liable for indefinite detention on vague suspicion of terrorism.  That all happens behind closed doors under cover of night (Obama signed the NDAA after hours on New Year’s Eve), but the banks are asked if it’s OK with them to not gamble taxpayer money away anymore.

Something else worth noticing is that a lot of powerful people seem to believe in the free market except where it would force them to compete.  Why were the banks not screaming about tainting the market when they demanded we pay their bills?

(And for those blaming “Republicans” for Obama’s failures, do remember that he dropped his campaign to rush to Washington to make sure he was on-record voting for the bank bailouts.  His voice wasn’t needed in the landslide, but he took special pains to make sure he was part of it.  I’d face facts that populism just isn’t his bag.)

Lanning E. Likes

Feb. 25, 2012, 4:38 p.m.

As long as mental midgets that have no idea of the long term consequences of their votes - are allowed to vote!! We will continue to have the on-going degenerate ideology of the Progressives corrupting Constitutional Government!

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)