The idea was simple. Create a clear rule, a ‘bright line’, that bans financial institutions from trading publicly protected and subsidized funds. That means Banks, like Bank of America, which is FDIC insured, would not be allowed to reap ridiculous profits (or huge losses) by trading on their funds: funds that are guaranteed by the Federal Reserve, that is, backed by little ole tax payers you and me.
The reason for the rule is equally simple: History. During the bad old days that led up to the Great Depression, no such firewall existed and banks were notoriously over leveraged. According to the Library of Congress, “After the Great Depression, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass–Steagall Act.” The Glass Steagall act was an attempt to save capitalism from its own excesses. One of the principle things the act did was introduce the separation of the bank types according to their business (commercial and investment banking). It also founded the Federal Deposit Insurance Corporation (FDIC) for insuring bank deposits.
The repeal of provisions of the Glass–Steagall Act by the Gramm–Leach–Bliley Act in 1999 effectively removed the separation that previously existed between investment banking which issued securities and commercial banks which made money through deposits. The deregulation also removed conflict-of-interest rules that had prevented investment bankers from serving as officers of commercial banks. It was the repeal of these prohibitions that contributed to the 2007-2008 economic meltdown in the U.S. allowing main street depositors’ money to flow into risky investments and exotic financial instruments like Credit Default Swaps (CDS) that confused even some of the top experts in the country. Some of these investments –like Credit Default Swaps– were nothing more than insurance policies written as financial instruments. In other words, bets that a particular investment would or wouldn’t fail, and payouts occurring if they failed; all of this outside the scope of traditional commercial financial or insurance regulation.
On January 21, 2010, President Barack Obama proposed bank regulations similar to some parts of Glass–Steagall in limiting the trading and investment capabilities of commercial (deposit) banks. This proposal was signed into law as the Dodd-Frank Act. The Volcker Rule, named after Paul A. Volcker, the former chairman of the Federal Reserve, was a small, but essential part of the act. It was meant to ban financial institutions that are protected and subsidized by the federal government (FDIC insured) from trading for their own account. That is: Traders shouldn’t speculate for their own personal gain using the money you and I pay in taxes. After the Dodd-Frank Act containing the Volcker Rule was passed, the SEC and banking regulators were required to actually implement Sections 619 and 620 through regulations of the Dodd-Frank Act (containing the Volcker Rule).
Well, the SEC/banking regulators have proposed their regulations for implementing the Volcker Rule and it is being universally panned as a bloated monstrosity, a disaster. According to Jesse Eisinger over at Pro Publica, “bank lobbyists with complicit regulators and legislators took a simple concept [the Volcker Rule] 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.”
Now whenever a federal agency proposes a substantive new regulation, by law it is required to seek public comment first. Normally the only parties that respond to agency comment requests are the companies that are affected by the regulations, and their attorneys (i.e. lawyers at the investment banks, in this case). As you might guess, their comments are always critical of regulation. But this time things are different. The Volcker Rule’s implementation was so egregiously awful that our friends at Occupy Wall Street took notice. A small subset of the Occupy folks have rechristened themselves, Occupy The SEC. They have written a 325 page comment to the SEC’s bloated implementation of the “Volcker Rule” that is as smart and sharp as anything you might expect from a Joseph Stiglitz or Paul Krugman. “it’s pretty clear, from reading the letter, that the people who wrote it are whip-smart and extremely talented.” Says Felix Salmon of Reuters, “its main authors are worth naming and celebrating: Akshat Tewary, Alexis Goldstein, Corley Miller, George Bailey, Caitlin Kline, Elizabeth Friedrich, and Eric Taylor.”
I haven’t read the entire 325 page letter yet, but what I have perused is impressive. I personally love how the Occupy SEC folks predicate the entire letter on the Volcker Rule with a footnote reference to their own declaration:
The first line of their letter reads: “The United States aspires to democracy, but no true democracy is attainable when the process is determined by economic power.” All the rest of their arguments, in some cases, incredibly detailed arguments, follow from this main premise: people come first. I’ll list a couple of tidbits that I thought worth savoring.
“Securities and Exchange Commission Chairman Mary Schapiro told the Financial Services Committee that, “[w]e have no interest in pursuing activity where people are intending to provide market-making and get it wrong.” The banking lobby was undoubtedly heartened by this frank admission of regulatory forbearance. Even so, the Securities and Exchange Commission (SEC) and the other Agencies are reminded that Section 619 requires strict compliance and imposes strict liability. Nowhere does the statute forgive “well-intentioned” breaches of the law.”
Indeed, why should ‘intentions’ enter into it? How often does a speeding motorists get to plead that they didn’t ‘intend’ to speed?
Here’s another noteworthy admonishment:
“The Proposed Rule also evinces a remarkable solicitude for the interests of banking corporations over those of investors, consumers, taxpayers and other human beings. In their Overview of the Proposed Rule, “the Agencies request comment on the potential impacts the proposed approach may have on banking entities and the businesses in which they engage,” but curiously fail to solicit comment on the potential impact on consumers, depositors, or taxpayers.… The Agencies seem to have lost sight of the fact that “interested persons” could include human beings, and not just banking corporations.”
Corporate banking interests are paramount for the SEC, superseding day to day human beings who must live and die because of the fallout /and or failure of such regulations.
“The “invisible hand of the free market,” that darling cherub of neoliberal economics, will likely push much of the current proprietary trading into the folds of hedge funds or traditional investment banks, not eliminate them outright (assuming, of course, that such activities actually add productive value to the economy). The Volcker Rule simply removes the government’s all-too-visible hand from underneath the pampered haunches of banking conglomerates.”
Translation, if you want to trade risky financial instruments, have at it, but don’t expect US tax payers to bail you out. You can be a hedge fund or a traditional bank (foregoing financially insane instruments like CDSs), but you can’t be both.
You can read the full text of the comment letter here (pdf).
Here are the steps the Occupy SEC folks recommend should you wish to write your own letter:
Read the Congressional Record from July 15th, 2010 where Sens. Merkley and Levin describe the Volcker Rule. (pdf here)
Read the statutory text for the Volcker Rule (part of the Dodd-Frank Act) here.
Read the implementation of the statute, which is the Volcker Rule Text, all 500+ pages of it (don’t worry, it’s double-spaced, pdf) here.
To send in your comment letter, here are the directions for electronic or paper comment submissions. Good luck and keep us posted!
As always, APV thanks our friend, activist and writer Jack Johnson for contributing his work to our blog.