What is the Volcker rule? The headlines in the press describe a nebulously defined financial regulation as being the second coming of financial reform Yet the only thing clear about the Volcker rule is who it is named after, former Federal Reserve chair Paul Volcker. The Volcker rule was a last minute financial regulation rule in an attempt to stop speculative trading by Wall Street. It has been politicized, lobbied against, delayed, watered down and modified heavily. The final rule just approved is over 900 pages and still is littered with loopholes and exceptions to stop speculative proprietary trading done by Too Big To Fail, FDIC backed banks. The rule is so complex, it is seen as a boondoggle for lawyers to analyze and advise on.
A watchdog group, Occupy the SEC gave the final Volcker rule a C- as an initial grade. They acknowledge some of the positive parts of the Volcker rule. For example there is a new CEO certification requirement in the rule since banking executives are the final arbitrators on risky speculative bets. Yet Occupy the SEC's initial criticisms amplify the rat maze confusing, loophole ridden, 900 page legal bonanza the Volcker rule became.
- The Final Rule inappropriately defines the scope of “covered funds.” Section 619 permitted regulators to limit bank investment into private equity funds, hedge funds, and “any other such similar funds.” The Agencies did not adequately use their authority to include “similar funds” into the scope of the prohibition. This omission paves the way for bank holding companies to evade the Volcker Rule by shifting their proprietary trading activities away from hedge funds into other, noncovered funds. For instance, recent reports suggest that Goldman Sachs intends to avoid the Volcker restrictions by focusing
some of its speculative activities in Business Development Companies, which are not only exempt from Volcker compliance, but are also eligible for relaxed oversight and compliance responsibilities under the JOBS Act.
- Recent reports had suggested that the Final Rule unambiguously closed the loophole for portfolio hedging, in response to the political fallout from J.P. Morgan’s London Whale fiasco. However, the actual language of the Final Rule is not as clearcut in rejecting the use of macro level hedging strategies. For instance, the Rule allows hedging to occur on an aggregated basis and across multiple trading desks, without adequate safeguards for particularized identification of risk.
- The Final Rule exempts repurchase agreements (“repos”) from the Volcker Rule’s ambit, despite the pernicious role that such agreements played in the credit crisis of 2008.
According to the Huffington Post, the rule's enforcement is really left up to the banks themselves. Needless to say that is a recipe for further disaster.
The establishment of parameters that ultimately will determine whether banks are complying with the rule was left to the banks themselves. The rule also relies on banks to tell regulators whether their trading practices, as they define them, comply with its provisions. Regulators largely will be responsible for double-checking the banks’ work.
The group, Americans for Financial Reform mentions the implementation details are the key for the Volcker rule to have any effect. Naked Capitalism also points to the real problem is in the lack of enforcement details of the Volcker rule. It is becoming clear this is yet another Wall Street will police themselves regulation, which de facto isn't a regulation as seen with the recent JPMorgan Chase problems.
The enforcement language gives even more cause for pause. The penalties basically amount to telling the banks to cut it out and then having the various regulators invoke their existing power if they see the need.
Bloomberg said Wall Street breathed a sign of relief when the new Volcker rule was finalized, never a good sign something is actually effective. There is a whole class of speculative proprietary trades called market making. Market making is also known as principle trading, or buying and selling securities to bank customers, making big bucks on price fluctuation, spreads and fees. Wall Street feels confident those financial activities remain unregulated and intact.
Changes in the final wording broadened exemptions for banks’ market-making desks, which generate more than $40 billion a year in revenue.
Forbes is more brazen in their assessment, they point to the massive lobbying done on the Volcker rule, proclaim this won't work or stop anything, and make another call to reinstate Glass-Steagall, the law which put a firewall between commercial banking and investment banking. Even one of the original Volcker rule bill sponsors, Sen. Jeff Merkley, doubts the enforcement effectiveness of the new rule.
"Trying to hide proprietary trading inside offsetting risks will be very burdensome," says Merkley. "That will drive the proprietary trading where it should be -- inside legitimate hedge funds."
At least, it will for now. The danger comes when the bubble appears and regulators begin to believe that 2013's regulations can't possibly apply to a world in which banks have come up with [insert mind-numbingly complex financial innovation here]. That raises the possibility -- which exists with a lot of financial rules that rely on regulatory discretion -- that the rule will be enforced too aggressively in periods when it's not badly needed and too loosely in periods when it is badly needed.
"I’m not confident this will be working 10 or 15 years from now," Merkley acknowledges. "That depends very much on the folks who are working as regulators."
The rule is also so complicated MarketWatch compared it to Obamacare and noted:
If a national health care system took the route the Volcker Rule has, we’d all be dead from complications from hangnails by the time coverage kicked in.
The bottom line seems to be the entire financial crisis, the derivatives, the speculative trading, the foreclosures and most importantly, the middle class mass economic genocide is seemingly being swept under the rug. There has been much fanfare over the Volcker rule yet it is obvious this is no real financial reform. America needs Glass-Stegall reinstated and a 900 page nebulous rule on various property trades with Wall Street policing itself is not the great financial reform America needs after such a financial calamity. Yet, five years after Wall Street brought the globe to her financial knees, memories fade. America, per the dictates of corporate controlled media, has decided to move on. The fact the financial crisis could happen again is now a secret that shall not be mentioned, in spite of the massive wreckage everywhere to this day showing what an economic neutron bomb the financial crisis was.