Volcker Rules?

By Simon Johnson

Bloomberg reports this morning that Treasury is gently letting the Volcker Rule (limiting proprietary trading for big banks) slip – Secretary Geithner would grant greater discretion to regulators which, in today’s context, most likely means not make the restriction effective.

This step is consistent with the broader assessment of the Volcker Rules that Peter Boone and I have in The New Republic (print and on-line): the underlying principles are sound, but the Rules have not been well-designed, and top people in the administration show little sign of wanting to make them effective.  This dimension of financial reform does not appear to be headed anywhere meaningful – and the main issues (bank size, capital, and derivatives) are not yet seriously on the table.

In the recent Senate Banking hearings on the Volcker Rules, John Reed – former head of Citibank – was adamant that the Volcker Rules made sense and could be made to work.  His point is that the executives know who is taking risk with the bank’s balance sheet – it’s a well-defined group within any bank with its own (speculative) culture – and this should be discontinued for banks that are in any sense too big to fail. 

You really do not want high octane speculators at the heart of this country’s largest banks.   Make banking boring, Reed argues with conviction.

20 thoughts on “Volcker Rules?

  1. Mark Thoma has something on this from a trusted but unnamed source:

    It’s a lot of inside baseball, but the way the administration proposed the Volcker Rule essentially guaranteed that it would never see the light of day.
    FWIW, the most aggressive opponents of financial reform (by far) have been the insurance companies. They seem to be violently opposed to pretty much everything in financial reform.

    Thanks, guys.

  2. 02-23-10 02:14 PM – Huffington Post – excerpt

    “In a letter sent today to Congressional committees, the Project on Government Oversight (POGO) said that Congressional efforts at financial reform will come up short if Wall Street continues to be partly regulated by the Financial Industry Regulatory Authority (FINRA), a private regulator funded by the very Wall Street firms it’s charged with overseeing.”


  3. I am no fan of FINRA, formerly the NASD which was founded and has been in operation since 1939. They a a bunch of dot the i’s and cross the t’s kind of organization—the ultimate practitioners of bureaucratic bs. They have never saved an investor from an unscrupulous broker, i.e Bernie Madoff. This is not intended as a FINRA defense, but FINRA was not responsible for:
    1. low interest rates set by the Fed
    2. sub-prime lending by unregulated lenders (who unregulated them?? I don’t know but it wasn’t FINRA)
    3. the Commodities Futures Moderniation Act of 2000 (Congress)which exempted those nasty derivatives from any reasonable form of transparency
    4. those insane AAA ratings bestowed by all the rating agencies on the tranches of untraceable mortgages and MBS’s
    5. the Bigger than Bear Stearns Rule change by the SEC in 2004 that exempted the big five (or was it six) from the 12-1 leverage limit
    6. and Congress’s repeal of Glass Steagel by a Republican Congress which Clinton signed.

    My opinion is that FINRA is useless but not culpable in this crisis.

  4. Ooops…I forgot to mention Congress again in its failure to oversee the GSEs Fannie and Freddie even though there was plenty of evidence of “irregular” bookkeeping to support huge bonuses to chief execs.

    I am beginning to think that FINRA, you (Rickk), and I are the only entities NOT responsible for the crisis. lol

  5. “FINRA is supposed to look out for investors, but POGO says the organization too often looks out for Wall Street, a charge also applicable to other private regulators that help government police the financial industry. Financial sector self-regulators, despite the power vested in them by the federal government, have failed to prevent virtually all of the major securities scandals since the 1980s,” POGO writes.”

    I would substitute the term “useless” with co-conspirators.

    Jan 14, 2009

    WASHINGTON (Reuters) – “The watchdog for U.S. brokerages said it investigated 19 trading complaints about Bernard Madoff’s broker-dealer firm but said they did not relate to any of the investment advisory issues involved in the financier’s alleged $50 billion fraud. FINRA said it only has authority over Madoff’s broker-dealer business and did not have the authority to examine the books and record of Madoff’s investment adviser business.

    “There was never any indication in the broker-dealer operation of the fraud that Bernard Madoff allegedly carried out,” FINRA said in an emailed statement.”


  6. Thanks for being so concise.

    Since they are ALL implicated, ALL will stick to the same story.

    I guess we wait until they push it over the edge…sort of like what the insurance companies are doing with their huge price increases. After the deluge, who?…

  7. “As a result of the crisis and various government rescue efforts, the largest six banks in our economy now have total assets in excess of 63 percent of GDP (based on the latest available data).” As you guys have cited several times, hopefully President Obama understands how troubling “63 percent” really is, and means….

    “And now, the hubris of top bankers–spurning audiences with the president and paying themselves huge bonuses, despite White House protests–has finally caught up with them. Even Wall Street cannot moon the giant and get away with it.” ooh gosh :-)

    “…Volcker Rules or no, the president apparently still doesn’t get this.” Sorry to say, but I think President Obama DOES get it–through his rhetoric on the one hand, but through his intellectual dishonesty and lack of executive decision-making experience on the other.

    “Unless Bernanke unexpectedly changes his stripes, his reappointment gives up a major hostage to fortune–and to those Democrats and Republicans opposing serious financial reform” Read somewhere that Mr. Bernanke is agreeing with President Obama and the Administration’s regulatory proposals (regulating, taxing, cap requirements) and not proposing anything contrary or beyond what has already been discussed by the Administration.

    ”The Obama administration lacks an inner core of smart, well-informed advisers who are deeply skeptical of big banks and eager to do whatever it takes to break a cycle that points to financial and fiscal doom.” Not arguing on semantics but President Obama surrounded himself with “experienced” and “talented” advisors since it’s somewhat missing on the President himself; lacking the experience, leadership qualities, and doesn’t stand on principals more often than not. Serving in the Senate barely two years out and based on some of President Obama’s own statements during his 2008 presidential bid (claiming he had the “judgment” to call it right on the two wars, healthcare, education, politics (see below), and finance), it probably shouldn’t be too surprising.

    “Rahm Emanuel famously said, “You never want to let a serious crisis go to waste.” President Obama hired the right media contents control person but apparently the public is wising up to it and may be by now, seeing through President Obama’s commanding rhetoric. Rahm Emanuel is a Blue Dog Democrat so that may have had a lot to do with defending the appointments and advisors of Summers, Geithner, Bernanke, et al.


    ”How will it counter anyone who argues, simply and truthfully, that the crisis is over and we wasted it?”

    Breaking up the TBTF solution is too much change so the Administration is opting for the lesser options (already discussed); it’s an extension of their hold on power for themselves and by proxy, Wall Street.

  8. Mary Schapiro headed FINRA during many of the years that Madoff was committing fraud. She was promoted by the current president to head the SEC which is not a “private regulatory agency.” You will get no defense of FINRA from me: I agreed with you that they couldn’t even catch out-and-out crooks, but if you want to see who is really lobbying Congress and might have some significant influence on policy and rules changes, compare NASD lobbying expenditures to Goldman, BofA, Citigroup etc.
    Just search this database:

  9. Absolutely we need to stop urgently the “too big to fail” before they end up substituted by the “too big to govern”. Whatever, let us never forget that “laissez govern” is infinitely more dangerous than “laissez faire”

  10. We’ve got the best example in creation of the solution to the banking problem sitting on the ground up in ND – since 1919 in fact. The State Bank of North Dakota. Run by politicians & political appointees & government employees.

    There is a $1 billion surplus, no housing problem, lowest unemployment in the country – all not only without the Fed but more importantly in spite of the Fed.

    Just replace the bankster run Fed with an independent body of economists (including Simon if you like)approved by the senate for monetary policy & open 49 more state banks.

  11. On politicians, etc running the State Bank of North Dakota –

    Are politicians bad, yes, they’re terrible. Banksters are just infinitely worse.

  12. Volckerbuki.

    What I really want to know, why is it that competent individuals like Volcker, Marty Lederman, Dawn Johnsen are, at this point, willing to be associated with the three stooges kabuki that “Bygones” Obama and his forward looking minions are architecting? Whether it is Fed Bubble or Peak Torture, even if the indecent and unsustainable can be prepped up for a few years more, why would any decent and intelligent person want to be associated with this no-motion trainwreck?

  13. Politicians are cheaper by the dozen. The pompous, pretentious, fat cat banksters of course see themselves in high demand & very expensive.

  14. Need any more proof that the Fed needs to replaced with by an independent body of economists?

    Wonder what this new fraud will cost us?

    From “Jesse’s Cafe Amercain”:

    “Treasury to Resume the Monetization of the Fed’s Programs to Support the Wall Street Banks

    “It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder.” Frederic Bastiat

    This Treasury Supplemental Financing Program is designed to provide public funds for the Fed’s efforts to purchase and then liquidate toxic assets and derivatives from the financial sector, effectively absorbing their losses and monetizing them.

    The Treasury creates new notes and sells them on the open market. The money obtained in these sales is deposited at an account at the Federal Reserve. The Federal Reserve uses this money to purchase toxic assets from the banks at its own discretion and pricing, subject to little oversight and market discipline.

    Senator Chris Dodd said “the Fed could become an ‘effective Resolution Trust Corporation,’ purchasing and ultimately disposing of depreciated assets.

    It looks very much like a stealth bailout. It is even more of a scandal because of the Fed’s resistance to any disclosures on the principles and specifics by which they are allocating taxpayer money.

    Where this gets even more interesting is that the Fed in turn is buying Treasury debt after issuance through its primary dealers, debt that was issued by the Treasury to provide funds to the Fed.

    Even more than a stealth bailout, this is starting to smell like ‘a money machine.’ Money machines are what Bernanke euphemistically called ‘a printing press.’ What is odious about this particular printing press is that the output is being given directly to a few big banks by a private organization which they own.

    I believe that it is still illegal, by the letter of the statutes, for the Fed to directly purchase Treasury paper. But in this case, the Fed is buying Treasury paper with money supplied by the Treasury. Since the paper is passing through the marketplace, and the Primary Dealers are taking their commissions, it may be in conformance with the letter of the law. But it looks like it violates the spirit of the law.

    d given that in many cases the Primary Dealers are the principal beneficiaries of the subsidy programs, selling their toxic debt to the Fed at non-market prices, this starts to appear like a right proper daisy chain of self-dealing and fraud.

    As you can see from the background information below, this is a ‘temporary’ program from 2008 that the Treasury keeps promising to ‘wind down.’

    This is not a resolution trust by any measure. One only has to compare what happened with the Savings and Loan Resolution Trust, with the orderly liquidation of assets, losses assumed by the individual banks and their management, and investigations and prosecutions for fraud.

    And the bankers involved in the Savings and Loan bubble and collapse were not still in business and giving themselves record bonuses within twelve months of their collapse, and engaging in the same frauds and speculation that led to the crisis.”

  15. Can anybody make sense that Wall Street is making wonderful profits and paying record bonus, while the nation is in recession ? Wall Street was awarded the bailout just a year ago at the cost of the taxpayer carrying trillion dollar deficit and 10% unemployment. Yet high profits of Wall Street comes from the historical large interest rate spread that FED created in the name of recession.

    Who is the winner and who is the loser? It is kind of obvious! Vocker Rules won’t work not because Wall Street is too weak to bear it, just the opposite, Wall Street is too strong to be defeated. Government has to bow before it.

  16. Surprise! The Volcker Rule is dead. Alas, it was DOA, as evident in Volcker’s own presentation of the Rule in his 1-31-10 NY Times op-ed, which was explicitly vague both on defining the proprietary trading to be limit[ed]” (not “banned”) and on the specific size cap for big finance. Simon Johnson’s assessment (above) puts the matter most diplomatically: “. . . the underlying principles are sound, but the Rules have not been well-designed, and top people in the administration show little sign of wanting to make them effective.”

    In other words, the fix was in from the start. The belated inclusion of the Volcker Rule in the Obama financial plan–coming a couple of days after the surprise GOP senatorial win in Massachusetts–was obviously part of the “populism card” that the Obama adm’n played in response not only to Massachusetts but to the Tea Party and GOP exploitation of public resentment against big finance.

    The Volcker Rule was “well-designed” for only one thing: Deceiving the public. Johnson’s “top people in the administration” responsible for this little episode include, please note, the hallowed Volcker himself.

  17. I note that the first comment asked why our leaders are so lame. Fact is they’re not. When we have a thriving oligarchy (a high octane cooperative arrangement between the wealthy and powerful and the elected officials), this is absolutely by the book. I don’t discount the potential for Volcker to impact the big banks, but whatever happens will be lip service pap to get critics silenced until the next round of obscene bonuses. This is where America is. It’s just like the military. They close a few bases in this country, or discontinue a couple of (out of date) weapons to show that they are sincere about cutting spending and then continue operating the hundreds of off shore bases (with golf courses and five star hotels, I might add) and fund “black ops” off budget. It is the world’s most effective shell game. We can’t be rational about this, we need to take back the country from the abusive ruling elite. Maybe there will be some truly smart, well-meaning, sincere candidates (who aren’t relying of standard two party campaign financing) who will run and get elected in the upcoming cycle. When pigs fly!!

  18. The Volker Rules were never intended to be adopted and were unworkable. If history has taught us anything it is that we cannot rely on regulators to beat back the forces of Big Finance. Politicians rely on Big Finance for funding and most don’t understand how it works. They appoint deregulators to run the show or, at the behest of Big Finance, threaten the budgets and careers of regulators who try to regulate in the public interest. Insofar as Volker Rules depended on the follow-through of political appointees, it was always doomed to failure.

    The answer is not to empower regulators to do the right thing. Few incumbent rergulators know what that is and fewer still are prepared to sacrifice their careers by pushing for effective limits on Big Finance. The answer is to do something similar to what we did in the 1930s: Change the structure of the financial industry so it can no longer (at least for 50 or so years) dominate the other institutions of our society. The current Congress and administration have no stomach for this, particularly in an election year (remember corporate free speech?). Things will need to get much worse–which is highly likely–before appropriate responses are even contemplated. Volker Rules were really only a Volker Ruse.

  19. From CNBC
    “The Volcker rule might be appropriate,” Bernanke said, but warned of the need to ensure it didn’t inappropriately impinge on banks’ ability to manage risk.
    What a complete cop-out. This is precisely the issue. The language is more suited to Alice in Wonderland. It is obvious to just about everyone that the only purpose of NOT following the Volcker rule would be to ALLOW the banks to take on risk. This is, if a correct attribution an astonishing volte face on reform. It deserves a corruscating response

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