The Treasury Position – On The Volcker Rule

Former Secretary of State George Shultz famously quipped about Washington: “Nothing ever gets settled in this town. You have to keep fighting, every inch of the way.” This is proving just as true for banking reform as for other aspects of American government policy.

For example, Senators Carl Levin of Michigan and Jeff Merkley of Oregon, after considerable effort, were able to place strong language in the Dodd-Frank financial-sector legislation – enacting a version of the “Volcker Rule” that would require big banks to become significantly less risky. While this idea originated with Paul Volcker, the former Fed chairman and senior adviser to President Obama, and was announced with great fanfare by the president himself in January, it was clear – from the beginning and throughout the detailed negotiations this spring – that the Treasury Department was less than fully enthusiastic about this approach.

Treasury’s position – ranging from lukewarm support to outright opposition at times – created an uphill task for Senators Levin and Merkley. And now that they have reached the top of the Dodd-Frank hill, what do they see? Another even steeper climb awaits, because the Treasury Department is digging in publicly against the drafting of detailed regulatory rules that would actually make Volcker-Levin-Merkley effective.

In a strongly worded letter to regulators, released on Tuesday, the two senators laid out in some detail exactly what the law requires – and they are tough and quite specific on reducing conflicts of interest, limiting proprietary trading and ensuring that market-making doesn’t become a hidden way for banks to take huge risks. Just in case there is any doubt about the legislative intent, the senators forwarded their colloquy from the Congressional Record – an exchange on the Senate floor in which they, as drafters for this part of the legislation, made the intent as clear as possible. This is the entire Congressional discussion on the specifics for this part of the legislation, and the Senators have made it easy for any judge in the future to determine what they really wanted to achieve.

Treasury Secretary Timothy Geithner made his view on these issues quite clear in a major speech at New York University on Monday, and it would be an understatement to say he is not in complete agreement with Volcker-Merkley-Levin. Mr. Geithner’s theme sounded reasonable enough – “maintaining a balance” between curtailing financial excess and benefiting from financial innovation. But if you look carefully at the details, you understand why so many pro-reform people behind the scenes are becoming increasingly frustrated with Mr. Geithner’s philosophy.

Amazingly, Mr. Geithner made no reference to the Volcker Rule, either explicitly or even implicitly – despite the centrality of this idea to the recent debate. It appears to be nowhere at all in his list of priorities (or on the “to do” list of Michael Barr, the responsible Assistant Secretary, who gave a follow-up speech on Wednesday). He is apparently signaling to all the regulators involved that this is not a top priority for the administration and – presumably – they should toe this line if they would like to be reappointed. Treasury carries great weight on these issues, even with nominally independent regulators, and in the Treasury interpretation big banks would be allowed to rearrange their activities so they can still effectively take big risks – earning big returns in good times and creating major problems for the rest of us when the cycle next turns down.

Mr. Geithner is insisting, as he did throughout the Congressional negotiations, that all the weight should be placed on increasing capital and improving its quality. This is not objectionable as one element of a reform strategy, but it still looks very much like putting all our eggs in one dubious basket – one that has failed us repeatedly before.

The latest details on the international negotiations for higher capital requirements – to which Mr. Geithner continually defers – are not any more encouraging. All the indications from the so-called Basel 3 process are that banks are fighting back hard against having to hold substantially stronger buffers against future losses. The Treasury may not have conceded all the ground on this issue, but it is in retreat – with the Secretary insisting on Tuesday that raising capital requirements could damage growth, despite all the evidence to the contrary (reviewed here last week).

Given this context, we should worry and wonder about the “financial innovation” to which the secretary alludes. Again, this sounds good in principle, but in practice the benefits are elusive, if not illusory – other than for people in privileged positions within the financial sector. Mr. Geithner wants the financial sector to be able to take more risk – but to what end, from the point of view of society as a whole?

Mr. Shultz is also reported to have said: “I learned in business that you had to be very careful when you told somebody that’s working for you to do something, because the chances were very high he’d do it. In government, you don’t have to worry about that.” For all our sakes, let us hope Congress fights hard to prevent  important parts of the Dodd-Frank bill from falling into the abyss of regulatory inaction and inattention – the place that just brought us the greatest recession since World War II.

This post appeared today on the NYT.com’s Economix; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

30 responses to “The Treasury Position – On The Volcker Rule

  1. On the bright side, Tim has a good chance of overtaking Andrew Mellon as the most famous Treasury Secretary in history.

  2. “Knowledge grows by sharing. When you find it, repost and and forward it wherever you can. Little by little, the truth will find a way, but it takes our efforts to set it free. I think that I am running about 12 to 24 months ahead of the curve, so the ideas expressed here will not obtain much credit now. But watch as things unfold. There is more to tell, but revelations have to be made in their due course.

    And if by chance, for whatever reason, this blog should ever go dark before happier times can come, then remember me in your thoughts and prayers, as I will remember you.”

    http://jessescrossroadscafe.blogspot.com/search?updated-max=2010-07-07T18%3A53%3A00-04%3A00&max-results=10

  3. “Nothing ever gets settled in this town. You have to keep fighting, every inch of the way.”

    That sums up nicely why we can never “regulate” corporate rackets; even if real regulation ever were enacted in good faith and initially rigorously enforced (needless to say the sham “regulation” of today embodies none of those criteria), so long as the rackets exist at all they relentlessly wage a war of attrition which regulation must inevitably lose.

    So the only way to take back the country and redeem democracy is to eradicate the rackets completely.

  4. One might ask: “What is it that scares Treasury and the Federal Reserve about Carl Levin, Jeff Merkley, and the most scary to the Treasury and the Fed—the ‘frightening’ Miss Elizabeth Warren??? What is it that is so dastardly and scary about these 3 mild-mannered looking individuals??? Why do they strike fear into the heart of phoneys like Timothy Geithner, Ben Bernanke, and Larry Summers????”

    Answer: The fact that the 3 individuals know the difference between cosmetic reform and real reform. I say, (and I hope my facetiousness shines through) what a frightening day it would be when that disease of insight spreads.

  5. Given that securitization seems to be as dead as Andrew Mellon, is it possible that all the blather about banking risk is simply fighting the last war?

    The war ended when the looters were bailed out. They are now doing fine, and as for all that new lending which the bailout was supposed to unleash, that fantasy has now been exposed. Real financial reform would have liquidated AIG, Goldman, BofA, City and perhaps JPM Chase. Real reform would have produced notable incarcerations among the executive class.

    Instead, we have well meaning intelligent people fussing about the appointment of Elizabeth Warren. All this would be funny were it not for the serious consequences for twenty percent of the workforce.

  6. How Wall Street Can Win

    08- 5-10 10:05 AM – Huff Post

    “As the battle over Wall Street reform shifts venues – from Capitol Hill to federal agencies – industry lobbyists who oppose some new regulations outnumber consumer advocates 50 to 1, an analysis of lobbying disclosure data shows.

    Although Congress passed and President Obama signed the Wall Street Reform and Consumer Protection Act last month, Congress did not iron out many of the law’s details. Lawmakers instead left that task up to regulators such as the Securities and Exchange Commission, FDIC and Federal Reserve.”

    Over the next two years, the regulators must conduct more than 60 studies and write some 250 rules. This process is well suited to seasoned industry lawyers and lobbyists who are skilled at analyzing the nitty gritty of proposed regulations.

    Even before the battle moved to the regulatory agencies, “the corporate onslaught was breathtaking,” said Heather Booth, top lobbyist for a coalition of consumer groups pushing for new restrictions on Wall Street.”

    http://www.huffingtonpost.com/2010/08/05/how-wall-street-can-win_n_671542.html

  7. Wow, all the heavies threw in food for thought, I’ll comment when I digest it.

  8. Simon J Needs an Internship

    One of the problems facing Johnson is the sheer lack of ability to understand what caused the financial crisis. Unfortunately that is what heppens when you are a lifetime academic.

    For example, Johnson cites the letter by Levin etc..which states that “The law is clear: the risky and abusive financial practices that drove our country into an economic ditch must end,”

    The core problem of course is that risky and abusive practices were carried out by the american public: millions of home-owners took out mortgages that they could not afford and used their homes as piggy banks.

    Easy credit caused the crisis. Johnson is desperately hanging on a a delusional volker, now that nobody is reading his book anymore.

  9. Internship wrote:

    “The core problem of course is that risky and abusive practices were carried out by the american public: millions of home-owners took out mortgages that they could not afford and used their homes as piggy banks.”

    Tax contributions

    “Goldman Sachs expected in December 2008 to pay $14 million in taxes worldwide for 2008 compared with $6 billion the previous year, after making $2.3 billion profit and paying $10.9 billion in employee pay and bonuses.

    The company’s effective income tax rate dropped to nearly 1 percent from 34.1 percent in 2007 due to an increase in permanent benefits as a percentage of lower earnings and changes in geographic earnings mix.[63][64]”

    http://en.wikipedia.org/wiki/Goldman_Sachs

    * Come back after your gonads descend.

  10. The question that I can’t ever seem to answer is why Geithner is so pro-Wall Street?

  11. Kenneth Etheredge

    Or why President Obama keeps him.

  12. Re: @ Simon J Needs an Internship___I take it you enjoy “Yellow Journalism”? eg. “The Big Short” (sensationalisn…borderline savoir`faire for the tyro that you are!) It will soon fade as all fantasy – but…”The 13 Bankers” will be the reading for ages. You dimwit!!!

  13. Re: @ Kenneth Etheredge___Subconsciously you just answered your very query.

  14. Simon J Needs an Internship

    Haha Florida: “Dimwit” is all you got? What a bunch of jokers! Ha Ha. please stay in school like johnson and kwak. “Ages” = 12 months. Nice

  15. Thanks you. The question that I can’t ever seem to answer is why Geithner is so pro-Wall Street?

  16. Williambanzai7

    His time will come…

  17. Like his boss, Timmy is aiming for the big payday post Sec-Treas. Alienating the big financials now would mean no mega-salary/perks/bonus position in (hopefully) Feb. 2013. Same for the Prez. One Tele-Prompter-guided speech every month @ $200K per pop adds up to a cool $2.4 mil annually to go with the book deals, etc., etc., from those who will always fawn over him. It will be easy livin’ post Prez. What a racket in the name of public service!

  18. I’m thinking the percentage is growing fast, hold on baby.

  19. ” He was Under Secretary of the Treasury for International Affairs (1998–2001) under Treasury Secretaries Robert Rubin and Lawrence Summers.[6] Summers was his mentor,[11][12] but other sources call him a Rubin protégé.[12][13][14]“

  20. “Real financial reform would have liquidated AIG, Goldman, BofA, City and perhaps JPM Chase. Real reform would have produced notable incarcerations among the executive class.”

    The entire global financial system as it stands today is a criminal enterprise, managed by ruthless criminals and sociopaths who exclusively and singularly reap the benefits of the socalled global financial system.

    Societies and the people are forced to suffer, hazard, and endure the shocks and crippling costs of systemic financial crisis caused by the predatorclass who owns and controls the financial system and hence governments.

    George Shultz, or is no advocate or friend of the people, is a pathological liar, and is insidiously deceptive in bruting the fiction that ” “Nothing ever gets settled in this town. You have to keep fighting, every inch of the way.” Things do if fact “get settled” in Washington all the time, and most of those settlements advance and perpetuate a system wherein the predatorclass exclusively benefits and prospers, and the people’s best interests suffer and decline.

    Until the people somehow alter this pernicious and ultimately lethal dynamic, Amerika is doomed to neverending boombustbailout cycles, a rapidly expanding divide between thehaves and thehavenots, and an increasingly criminal and ruthless system of kleptocratic governance owned and controlled by the criminal den of vipers and thieves in the predatorclass.

  21. As I replied to Annie earlier,”Annie, you got me to thinking that The Patriot Act and “Homeland Security” are just Orwellian double speak. Their lack of interest in how international bankers are screwing everyone makes me think “Oligarch Security”.

  22. Great article on consumer protection:

    http://www.propublica.org/article/new-york-jumps-ahead-of-feds-with-law-holding-mortgage-companies-accountabl

    if the treasury & congress wont act…because the financial sector owns them….maybe state and local regulators will take up the task.

  23. The real economy is dead. Take a look at the recent small business optimism index which declined again in July. Small businesses cannot offset weakness in the US with international sales. Get ready for QE 2.

    http://blackswaninsights.blogspot.com/2010/08/small-business-optimism-declines-great.html

  24. If the so-called smart people don’t turn this financial ship around and head us all in the right direction,I’m afraid we are going to see more of these workplace mass murders:

    http://americaspeaksink.com/2010/08/manchester-shooter-co-workers-called-him-n-word/comment-page-1/#comment-12545

  25. Unfortunately Barack Obama is a dedicated centrist with a primary goal of not angering big business interests – whether Wall Street as discussed above,the health insurance industry, big oil (why does Ken Salazar still head Department of Interior?) or the military contractors.

  26. “…securitization seems to be as dead as Andrew Mellon…”

    Really?

    http://www.securitization.net/

  27. The “American public” were merely tools fed an endless diet of greed-inducing enticements so that they could become part of a scam invented by and for Wall Street’s benefit. It isn’t an either/or situation and it never was. Trying to blame consumer’s for being stupid enough to buy Wall Street blandishments casts the money-guys in the worst light imaginable, carney barkers who don’t deserve the time of day, wouldn’t you agree?

    That the securitization machine the “smartest guys in the room” built got away from them only goes to show how inept, unprofessional, and foolish they are. All this without even mentioning their own overbearing greed.

    That’s the biggest lie of all, that the suits know what they’re doing. They don’t. The quants would have benefitted mightily from skipping a few classes on advanced statistics and spending more time examining the intricacies of non-linear dynamical systems.

    They’re brilliance was revealed to have been greatly exaggerated given that the transition to a completely different part of the solution space for their securitization appliance absolutely escaped them. They never saw it coming is is well-documented:

    http://www.technologyreview.com/business/19529/

  28. Banks prospered for centuries with no concept of securitization. I see no reason they will not be able to once again.