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December 29, 2013


(I am indebted for part of this essay’s research to Nomi Prins, who wrote and published an article in Nation of Change last week dealing with the Volcker Rule.)

Paul Volcker, a bear of a man nearer seven than six feet tall, was Jimmy Carter’s Fed Chief. The so-called Volcker Rule is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. The Volcker Rule was finally approved several days ago by regulators after years of big bank lobbying to fashion its terms to suit their industry’s wants and needs. It will start taking effect in April 2014 and full compliance will be required by July 2015. Big Wall Street banks have spent over a billion dollars in lobbying costs in trying to do and redo the rules and regulations that will implement the Dodd-Frank Act, including the Volcker Rule component, and they are continuing to spend millions every week on K Street lobbyists in Washington to stymie and/or re-fashion the substance of the Act by wheedling out exemptions and definitions of terms of the legislation to suit their Wall Street bank clients’ demands.

The Volcker Rule as applied is designed to reduce “excessive” risk in proprietary trading at banks, as though that were the only kind of risky trading banks do. Let’s take a look to see what other risky trading big banks do that adoption of the Volcker Rule DOES NOT cover. (Don’t go glassy-eyed now as you read through this list; that’s exactly what the big banks are counting on, that and the fact that you may have been placated to believe that adoption of the Volcker Rule has removed the risk that you will have to once again bail out the big banks that go over the risk cliff. The truth is that recent adoption of the Volcker Rule did not remove or even substantially reduce your total risk for another bailout and/or Great Recession II, so let’s not be fooled again by the big bank crapshooters in funding their risks.)

Post-Volcker, big banks may still:

(1) Trade government bonds, (2) Organize or offer hedge and private equity funds, acts that involve trading and which were intended to be prohibited under the original intent of the Volcker Rule, (3) Hedge, that is, protect themselves through trading, trading that is next to impossible to detect from any other kinds of trading and thus hard to regulate, (4) Underwrite, that is, create securities that contain multiple layers of financial complexity (see the toxic assets at the heart of our 2008 misadventure), and (5) Make markets, that is, trade on behalf of current or eventual clients with money not the banks’ own and thereby create risk (this is how the big banks make most of their trading profits).

Those five exemptions from the Volcker Rule are not the only ones. Big banks may still trade within their brokerage arms (proprietary or otherwise), which are theoretically distinct from their deposit-taking arms (except that such trades as carried on by their brokerage arms are not in fact distinct from deposit-taking activities). They may also trade within their insurance company arms as well as their brokerage arms, among other dodges from “bank” regulation available to them. Per Prins, “The real danger of the Volcker Rule isn’t just that it leaves the structure of Wall Street’s deposit-insured, security-distributing and market-making services intact. The danger is that Wall Street critics BELIEVE it makes a meaningful difference, that it’s an obvious road on the way to the Glass-Steagall reinstatement highway, and are thus not ranting and raving for it to be made stronger even as the bank lobbyists and lawyers are making every effort to further weaken it.” I am not placated. Stay tuned for more ranting and raving.  GERALD  E

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