The coming months will tell if the Volcker Rule and the prohibition on banks getting even larger will turn out to be substance or mere spin. I’m finally getting around to reading the transcript of the pre-announcement media briefing and I found a few things that were worth a smile.
1. On the cap on a single institution’s share of liabilities: “The 10 percent cap on insured deposits exists in current law. It was put in place in 1994. And what we’re saying is that deposit cap has served or country well.” Um, then why did you waive it for JPMorgan Chase, Bank of America, and Wells Fargo?
From Economics of Contempt (hat tip Brad DeLong):
“The single best thing we could do for financial reform: Triple the budgets of all financial regulatory agencies. Immediately. Regulators are woefully understaffed; this is fact.”
I’m not sure about “single best,” but otherwise dead on. The agencies that are self-funding out of their businesses (banking for the Federal Reserve, insurance for the FDIC) have been less bad than the ones that are not (OCC, OTS).
Last week, Ryan Grim and Arthur Delaney wrote a story for the Huffington Post about the difficulty of getting substantive reform through the House Financial Services Committee. They focus on two main things. First, because a seat on the committee is valuable for fund-raising purposes, the Democratic House leadership seems to have stacked it with vulnerable freshman and sophomore representatives from Republican-leaning districts, meaning there are a lot of Democrats who are either personally inclined to vote with the financial services industry or feel a lot of political pressure to do so. Second, a lot of committee staffers end up switching sides to work as banking industry lobbyists, and some of them then come back to be committee staffers, raising the usual questions about the revolving door. Barney Frank comes off as something of a hero; the idea is that Frank and his senior staffers are so smart and skilled that they can get effective legislation through despite the cards being stacked against them.
The financial reform bill that passed the House recently is full of surprises, not all of them bad. A contact pointed me toward an amendment introduced in committee by Brad Miler and Ed Perlmutter; it’s number 61 on this list. Basically, the amendment gives the Federal Reserve (“Board” in the text refers to the Board of Governors of the Fed) the power to prohibit a financial institution from engaging in proprietary trading not only if it decides that proprietary trading threatens of the soundness of the institution itself, but also if the Board of Governors decides that it threatens the financial stability of the country.
While this may seem overzealous, the point is to prevent a large financial institution with a government guarantee (of any kind) from putting most of its capital to work on its proprietary trading desks and taking lots of risks that might require a government bailout. The amendment does have exceptions allowing firms to, for example, make a market in securities that they underwrite, so securities underwriting is not in question here.
As you already know if you read the news, the House version of the financial reform bill will probably come to a vote today, and it should have the votes to pass unless the Republicans/conservative Democrats manage to pass a poison pill amendment — like Walt Minnick’s amendment to kill off the CFPA and replace it with a council of regulators. (I’m not making this up.) The bank lobby moderate Democrats did manage to get federal preemption of state laws, which means that states can’t set higher standards than federal regulators and sounds like a bad thing (anyone remember the OTS?), but Mike Konczal says it might not be as bad as it sounds.
To be honest, I’m not sure what’s in this thing at the moment, and who knows how many little loopholes have managed to sneak in, especially when it comes to derivatives regulation. But if it has a meaningful CFPA (which I’m pretty sure it does), it’s a step forward. If it doesn’t break up big banks, it’s not enough.
By James Kwak
The post below, which looks like it could be extremely important, is by Mike Konczal, author of the popular (for those in the know) Rortybomb blog, a previous guest blogger on this site, and now a fellow at the Roosevelt Institute – James
Have lobbyists snuck another major loophole into the OTC Derivatives bill? This week the final touches are being put on Barney Frank’s financial regulation bill – H.R. 4173 – “Wall Street Reform and Consumer Protection Act of 2009.” One of the centerpieces of this reform is Title III: Over-the-Counter Derivatives Markets Act. And one of the goals of this reform would be to get as many derivatives as possible to trade on exchanges.
An initial hurdle for Barney Frank was what to do with an “end-user exemption.” This would exempt certain types of derivative buyers who use derivatives, say corporations hedging interest rate risk without speculating, from the extra scrutiny and regulation that comes with the exchange/clearing system. One of the narratives of financial reform so far has been that this initial end-user exemption was too large a loophole at first, and instead of just handling 10-20% of the market, it would let a large majority of the market sneak through, but ultimately Barney Frank was convinced by consumer groups and people pushing for stronger financial regulation and fixed this issue. See Noah Scheiber here in “Could Wall Street Actually Lose in Congress?” for this story, and it shows up as well in a recent profile of Barney Frank in Newsweek.
Many of us bloggers are better at criticizing than at proposing anything — especially when the world makes it so easy to be a critic. The Epicurean Dealmaker, who has sent the occasional volley of criticism my way (I’m not linking to examples because my ego is too fragile), recently decided to deal with this head-on and wrote a “reformist manifesto,” complete with an epigraph from The Communist Manifesto, with a list of specific proposals.
Basically these include cleaning up the regulatory structure, expanding the scope of regulation (consumer protection, hedge funds), moving “virtually all” OTC derivatives onto exchanges or clearinghouses (I believe that “virtually all” means the currently-proposed exemption for “end-user” hedges would be drastically reduced), and increasing Fed transparency. There is also this one: “Ban political campaign contributions by the financial industry.” I think that would be great, although there is at least one constitutional problem and possibly two there.
There’s nothing on the list that I disagree with.