The Brown Amendment: Do the Volcker Rules Live?

The administration may be distancing itself from the Volcker Rules, but the same is not true of all Senators.  (Why did President Obama go to the trouble of endorsing Mr. Volcker’s approach to limiting risk and size in the banking system, if his key implementers – led by Treasury Secretary Tim Geithner – were going to back down so quickly?)

Among a number of sensible amendments under development in the Senate, Senator Sherrod Brown (D., OH) proposes the following language: (update: text now attached)

“LIMIT ON LIABILITIES FOR BANK HOLDING COMPANIES AND FINANCIAL COMPANIES.—No bank holding company may possess non-deposit liabilities exceeding 3 percent of the annual gross domestic product of the United States.”

And a few paragraphs later, an essential point is made clear: this includes derivatives,

“OFF-BALANCE-SHEET LIABILITIES.—The computation of the limit established under subsection (a) shall take into account off-balance-sheet liabilities.”

And there is a strong provision for requiring prompt corrective action if any bank exceeds this hard size cap.

Naturally, the Federal Reserve is pushing back.

The Fed’s argument is that any kind of size limitation would be too blunt an instrument – successful regulation requires nuance and subtlety.

Perhaps, but there’s a big problem with relying on subtle regulators.  Over the past thirty years, almost all our regulators and supervisors have become either sleepy or captured – in a cognitive sense – by the very people they are supposed to be watching over.  (Chapters 3 and 4 in 13 Bankers document this in detail; more on that when the book comes out next Tuesday.)

The question of the day can be framed as the classic, “Who will guard the guardians?”  Or you can just ask, loudly, “Where the heck were the people charged with the safety and soundness of the system over the past decade?”

It would be sheer folly to rely on “smart regulation” going forward – yet Larry Summers and Tim Geithner seem to be taking that approach.  Just answer this, preferably in public: What happens when another president with the philosophy of a Reagan or a Bush starts to make appointments?

Or just think about this.  The New York Fed is run by a senior executive of Goldman Sachs.  At the same time, the former head of the New York Fed holds a top position at Goldman – where he is responsible for interacting with regulators around the world.  And the practices, if not the explicit rules, of the New York Fed apparently permit its board members to buy stock in companies that the Fed oversees.  Please explain exactly how this web of arrangements will help keep regulation strong and effective moving forward.

The Brown amendment is not perfect – in 13 Bankers we recommend a blanket size cap, rather than treating deposit and non-deposit liabilities separately.  But this amendment would definitely be a step in the right direction.

Our regulators have failed us, repeatedly.  What we need now is some smart legislation.

43 thoughts on “The Brown Amendment: Do the Volcker Rules Live?

  1. “Just answer this, preferably in public: What happens when another president with the philosophy of a Reagan or a Bush starts to make appointments?”

    Uh, that’s why you have a prompt corrective action regime. Why do you always insist that everyone who disagrees with you go into extreme detail about their proposals (like in your last post), when you yourself have never moved beyond the level of vague/superficial platitudes? You’ve never spent more than 2 sentences on PCA, even though it’s perhaps the most important aspect of financial reform. You’ve been writing the same post for over a year now, and you’ve never gone past saying “cap bank size!” Believe it or not, capping bank size would actually be complicated.

    Sure, your heavy doses of hyperbole are sufficient to impress starry-eyed journalists, but you can’t honestly expect people like Geithner and Bernanke to take you seriously, can you? You’re not on their level.

  2. I have an important question. What is the difference between the Federal Reserve System and the American Bankers Association???? I used to know the distinction between the two, but in recent years I have a hard time deciphering the difference.

  3. It would be sheer folly to rely on “smart regulation” going forward – yet Larry Summers and Tim Geithner seem to be taking that approach. Just answer this, preferably in public: What happens when another president with the philosophy of a Reagan or a Bush starts to make appointments?

    Umm, exactly how is it possible to have more of a Reagan neoliberal trickle-down ideology and practice than Obama?

    As I said most recently here

    and also elsewhere, Obama was telling the deepest truth when he called Reagan his hero. It’s clear that his ambition for his presidency is to out-Reagan Bush by consummating the Reagan Revolution where Bush failed. Escalating Bush’s Bailout and war, and extending the Bailout to the insuance rackets, are just warmups for his most cherished dream: totally privatizing (destroying) Social Security.

    Why did President Obama go to the trouble of endorsing Mr. Volcker’s approach to limiting risk and size in the banking system, if his key implementers – led by Treasury Secretary Tim Geithner – were going to back down so quickly?

    Here, on the other hand, we have his spinelessness, his cowardice. Just like with Israeli settlements, Obama will once in awhile feel that for show he needs to pretend to do something good for once. But having said he would, he then caves in where he faces the slightest resistance.

    The Fed’s argument is that any kind of size limitation would be too blunt an instrument – successful regulation requires nuance and subtlety.


    Ugh. What’s up with that “perhaps”? We know for a fact that only the bluntest, most brutal tools will suffice.

    We know for a fact that the most practical and moral solution is always simple and straightforward. And we know that anyone who wants to complexify and obscure things is just trying to enable and cover up his own crimes.

  4. Jeff,
    Isn’t it amazing how easy it was for AIG to sell off some of its bad assets??? You know some famous investors are already making huge bets on AIG now?? Yet you would have us believe breaking banks up or separating investment banking from retail banking is like attempting to move one of the Great Pyramids, or a space expedition to the Moon.

    I suggest your talents would be well-suited for the staff of the Senior Republican Senator of Alabama.

  5. “The Fed’s argument is that any kind of size limitation would be too blunt an instrument – successful regulation requires nuance and subtlety.”

    The Fed has always had the ability to address the behaviors that caused the financial crisis. Fed officials chose not to address them. The problem has always been primarily about officials’ motivation.

    If we do not limit banks’ political influence, we are essentially letting the banks regulate themselves, regardless of what we put on the books.

  6. We’re to the point of ‘worse than Bush’… At least we knew our enemy in GW, Obama sells the country into corporate serfdom, and they thank him for it.

  7. … and 60 medium-sized banks can wield as much political influence as 6 large banks.

    Perhaps what we need is a “Banking Exchange” where bankers could compete with better products and services. We could even include a “Public Option Bank” to keep the bankers honestly competing….

  8. That “public option” as you call it already exists. It’s called a Credit Union.

    Membership to Credit Unions is much easier than in years past.

    Unfortunately most people won’t bother to do the homework to switch. People apparently prefer to get lower interest on deposits and savings, higher interest on mortgages and loans, more fees, and worse service at the banks.

  9. jeff,
    As for the level of detail, it’s necessary because economic debate is often fueled by shoddy research. (Ask Yves Smith.) Evidently, neither bankers nor regulators have remembered to distinguish between the numbers they generate for legal and accounting purposes, and those numbers they put forward in sales presentations.

    I used to generate reports. I’ve seen this numbers tweaking done in presentations to customers, clients, and, which is really scary, to superiors.

  10. How can any company be fairly valued, taxed or regulated when it is allowed to have off book transactions, assets or liabilities? Why would anyone want to buy their stock or do business with them? Why should ever bail them out? How can we trust a system that allows this to exist?

  11. I guess the Great Recession just proved that TBTF banks actually worked in holding up the US financial system. Large financial institutions do seem handy policy instruments as in the narratives for the same period. And there is no evidence smaller banks, with inadequate economy of scale, would do better in global competition.

    Post Great Recession not only multi-national banks are bigger, but there is also a new breed of semi-private banks such as China’s big 4. They do enjoy unfair connection and advantages, but they are also obliged to serve goverment policy interests in time of crisis, under tighter scrutiny, and with stricter capital requirements, while they also have to compete head and shoulder among themselves.

    Therefore I’m not sure it’s better to do the leap of faith with the Volcker Rules, or even an regression to where we started from post 1930. Volcker Rules are irresistible for their prestine ideological and theoretical beauty, but I don’t believe they are what this country needs today. But we should not rule out Volcker’s Rules when we get there in another generation.

  12. Senator Sherrod Brown may be another freshman senator to watch as financial reforms take shape. It may not be as close of a vote as was the Stimulus package, but the recent votes on the healthcare package (Sunday) and then the signing by President Obama yesterday, then followed seven minutes later by the first court challenge, could make for another tough fight ahead, requiring more spine and possibly pulling another all-nighter (kind of like cramming for finals :-)

    The pros and cons of the “what if” scenario was discussed on banking disclosures, yesterday: ”The U.S. Court of Appeals in Manhattan ruled that the Feds must tell the public which banks might have failed without the taxpayer funded financial bailout.” ”Bloomberg LP, the parent of Bloomberg News, filed numerous Freedom of Information Act (FOIA) requests to find out where $2 trillion (give-or-take) of taxpayer money went but those requests went unanswered and the case ended up in court.”

  13. Until we get rid of the Fed, everything else is just nibbling around the edges. What we need is drastic action. That’s the only thing that will solve this problem once & for all.

    Remins me of an old Red Foxx joke about a group of colored men & boys out racoon hunting at night with dogs. When the dogs finally tree a racoon one of the more couragous young men volunteers to climb the tree & extract the racoon. Soon after he is heard calling down to the group below, “Just shot up here amongst us – some of us needs some relief”.

    What we need is some drastic relief, not more meaningless esoteric crap.

  14. In the immortal words of Bette Davis, “What a mess.”

    It’s almost comical (1) that Glass-Steagall, massive infrastructure investment via the Highway Transportation Act, NASA etc., collective bargaining, 90% tax rates produced what Kevin Philips in Wealth & Democracy termed our Golden Economic Age of 1955-1965.

    (2) that repealing Glass-Steagall, lowering tax rates, ignoring our infrastructure, breaking the unions has produced what Tim Geithner called, “The end of the world as we know it.”

    I have just two words for the “free and unfettered market” advocates among us, “Poverty sucks.”

  15. I think the new rules must be self-executing as opposed to requiring discretion on behalf of the regulators. Regulators can rationalize and/or be blinded.

    Of course, this means implementing rules which people can argue, in the abstract, could limit economic growth, but as in everything else in life, people must gives up something to avoid other something else.

  16. Senator Brown’s amendment does not define ” Off Balance Sheet Liability”. Off sheet liability is now a political propaganda term. Meaningless. Even worse, since we are dealing with a law, a very broad set of legal definitions would be required to define consolidation and consolidated. Also note that the GDP definition is 3 % of non deposit liabilities. Size limits should include deposits.

    I take it though that the offending Off Balance Sheet item is guarantee’s and sponsorships of funds. Would all guaranteed transactions be consolidated? Sponsorships of funds would be problematic where the BHC holds no ownership position or extended no guarantees.

    Unless, these kinds of laws are very explicit and well thought out they will only destroy what little is left of ability to understand financial statements assuming the 3 % limit is based on an official consolidated balance sheet.

    Then again, the consolidation would , I presume, only carry domestic consolidated units with the foreign units in the international consolidation carried at equity in the domestic consolidation for purposes of measuring the 3 %.

  17. W. C. Fields famously drawled, “never give a sucker an even break”. He was The Bank Dick. Now, in a slightly different guise, we have 13 of them.

  18. “The question of the day can be framed as the classic, “Who will guard the guardians?” Or you can just ask, loudly, “Where the heck were the people charged with the safety and soundness of the system over the past decade?””

    Another proposal in dealing with issue is the nine member systemic risk board. That sounds great now with the crisis fresh in our minds, but in recent history when has a regulatory body or council ever been able to effectively mandate someone to stop doing activities in which every firm is making enormous profits? Especially when their is no clear and present danger of failure fresh in the public mind. Stockholders will be making a killing and the board will be the most hated group in the nation. This goes along with the “nuanced” rules that the Fed is proposing. Simon is right, there must be steadfast rules and regs in place to avoid conflict in the far future.

  19. Mr. Johnson wrote:

    “Our regulators have failed us, repeatedly.”

    03-24-10 01:17 PM – Huff Post – excerpts

    The U.S. financial system is tilted in favor of the biggest banks, compromising the “very foundation of the economic system” and putting the nation at risk of continued crises, a top Federal Reserve official said Wednesday.

    “As a nation, we have violated the central tenants of any successful system,” Hoenig said. “We have seen the formation of a powerful group of financial firms. We have inadvertently granted them implied guarantees and favors, and we have suffered the consequences. We must correct these violations. “

  20. There is another interesting aspect to Senator Brown’s amendment . Liabilities are defined as assets recognized under Part 225, Title 12 CFR less Tier 1 capital. Brown is importing executive issued regulations codified in the Consolidated Federal Regulations into the statute. Change the Regulations, an administrative act, and you have the executive changing the law.

    It would be interesting to read Part 225, Title 12 CFR to see how the Regulation relies on accounting pronouncements. Of necessity, they must. Since the big accounting firms are “regulatorily captured” ( A joke ) get them to change the pronouncements. These accounting pronouncements determine what is recordable in financial statements and allows every bit of present off balance sheet activity.

    Working on the assumption that gross foreign assets are included in the definition of assets under Part 225, Title 12 CFR, the US would break up a big bank for having foreign operations. The ruling global sophisticate elites understand that this would be very adverse to US foreign policy. This would raise havoc with financing and refinancing Treasury borrowings.

  21. Ted K,

    That has absolutely nothing to do with anything I said. You’re arguing with a voice in your head — and losing, since your comment is borderline incoherent.

    But if imputing arguments to other people and then mocking them makes you feel smart, then go for it, slugger.

  22. Then answer this question: does Jeff fellate Ben Bernanke in reality, or only in fantasy?

    Just wonderin’.

  23. “Why did President Obama go to the trouble of endorsing Mr. Volcker’s approach to limiting risk and size in the banking system, if his key implementers – led by Treasury Secretary Tim Geithner – were going to back down so quickly?”

    Because he is a fraud? Granted, that’s nothing compared to being an enabler and protector of torturers past, and (courtesy AFM Apendix M and infinite detention) a torturer himself. But it counts.

    Hostis humanis generis. Among torturers and murderers, worrying about consistency, honesty or your wallet seems to lack a sense of proportions.

  24. The answer is: we can’t. The economy will continue to burn until there’s not much left at all, at which point someone will come in with a very well-thought-out plan around which masses will throng, and the new millenium will begin. If this doesn’t happen, it won’t matter anyway as we will be able to free ourselves of our bodies , physical needs and territoriality and it will all be as moot as can be.

  25. What do we lose if we restrict banks to liabilities no greater than 3% of GDP? I haven’t seen convincing specific examples of a need that cannot simply be met by using several smaller banks.

    And I think it’s safest to put the burden on banks to show why any economic obligation should be excluded from the 3% limit, whether off balance sheet or not. Otherwise, big banks will find a way to get much bigger by having their liabilities undercounted.

    In the fight against breaking up the big banks, we see the determination of parts of the financial sector to maintain their economic rents, and that’s about it. Any economic benefits of TBTF banks are very weak, and not worth the risk.

  26. Jeff,
    I think based on your 2 comments here I would let others judge who is “getting off” on mocking people. As for my comments which you call “borderline incoherent”, I think most people got the gist of it. I would call you slugger, but I’m guessing you’re more of a “switch-hitter”.

    Hope that’s coherent enough for you Jeff.

  27. The real problem is passing effective legislation that will not be tied down for years in regulation writing and litigation. But, first is it possible to pass legislation that has a chance of being effective? Congress is now a failed institution in the eyes of many. James Fallows in a major article in last months’s Atlantic summarized Congress as follows: ” A business organization as inflexible as the U.S. Congress would still have a major Whale Oil division: a military unit would be mainly fusiliers and cabvalry.”

    The US citizenry is mostly ignorantly factionalized . Just today Members of Congress have been threatened in their own districts to the point they are seeking protection. Today the London Daily Mail ran a piece that around 25 % of Republican’s consider the president to be the anti-christ. Even more considered him to be Hitler.

    Are we emerging as the ultimate wacko demos.

    The bankster’s are successfully diffusing any real reform. Here is Stiglitz in his latest book, Freefall. Page 44. ” The strategy of players in the financial markets was clear:let the advocates for real change in the banking sector talk and talk;the crisis will be over before an agreement is reached-and with the end of the crisis,momentum for reform will disappear.”

    The disease of populism will at long last have destroyed us or lead to a really nasty end result. Robert D Kaplan in his 2001 book ” Warrior Politics” frames the problem in his first sentence. ” The evils of the twentieth century arouse from populist movements that were monstrously exploited in the name of utopian ideals,and had their power amplified by new technologies.”

    The bank problem will be solvable only by direct law prescribing changes as was done with Glass- Steagal. Something like requiring a spin off to shareholder’s of certain business operations to pare the big banks down. One could even repeal the Bank Holding Company Act or sunset it in two years. Any breakup must rely on already tested legal methodologies to shorten litigation time.
    I very much doubt any of this is possible though. We might get an indication very shortly though if incumbents are really tossed in impending primaries for House and Senate seats. Only, a spontaneous voter revolt would send the message. Even this would be a long shot.

    The political system is now broken from changed circumstances. We have added too many divisive moncauses that are not reconcilable to the political pot for far too long.

  28. What we need is size caps AND Glass-Steagall. Let the banks get smaller and BE BANKS, not financial plutocratic, oligarchic, greedy behemoths, as they are now. The tale of cross over between big banks and government I find to be abhorrent, and beyond suspicious when it comes to effective regulation. Excuse my while I vomit!!!!

  29. If you look at the history of the Federal Reserve it’s as much (more) a creation of the private sector as the public. Many politicians of the time were vehemently opposed.

    One could take the point of view that private banks were tired of a never series of crises and wanted a reliable lender of last resort.

    The Federal Reserve has its own stock (shares in ownership). All those shares, by definition, are held by private banks.

    One needs to look beyond the fact that Fed governors (including the chairman of course) are appointed by the government.

  30. The Volker Rules are the Volker Ruse, through no fault of Mr. Volker. He has been captured by the friends of GS and TBTF. You cannot leave the limits to the discretion of regulators, in large part because there are no regulators. Real regulators have been driven out of the business over tha past 20-30 years or have been co-opted by their bosses or the agencies in which they work.

    Someone, anyone, tell me what in the current proposals for re-regulation of the financial system would prevent a repeat of 2007 thru 2009. Please tell me, I’m anxious to hear. By my analysis, which is limited, there is nothing standing between us and another disaster but the same folks who brought us the last disaster.

    The answer is not to grant regulators more discretion. I spent 27 years as a regulator and, fortunately, my discretion was not so limited. But I pushed the broom behind the elephant in enforcement. I saw what you don’t want to see and what will not be effective no matter how well intentioned it is. If it is effective, it won’t happen.

    The answer is to change the structure. Not reserve levels that the FASB be will allow to be fudged as soon as the bankers pressure Congress. Not the purported regulation of off-books accounting, which FASB and the SEC caved on before SIVs were jammed full of toxic securities. No. I mean Glass-Steagal on steroids. Without it, forget the future. Tell your children or grandchildren (if you have any) to become investment bankers and hope–I mean HOPE– they throw some your way. Because we are screwed.

  31. JerryJ wrote:

    “The political system is now broken…”

    03-23-10 08:36 PM – Huff Post – excerpts

    “According to an employee of one of the country’s largest financial institutions, facilitating mortgage modifications for struggling homeowners is not a priority at his bank, where he says he has not seen the completion of a single loan modification in the last year.

    The employee, who opted to remain anonymous because he feared he could lose his job, told ABC News that mortgage-modification applicants are frequently directed to an 800 number that the bank uses to evade and delay their requests.”

  32. Jim Coffman wrote:

    “The Volker Rules are the Volker Ruse, through no fault of Mr. Volker…The answer is to change the structure…Glass–Steagall on steroids. Without it, forget the future. ”

    “The truth is rarely pure and never simple.”

    Oscar Wilde (1854 – 1900)

  33. What we need now is guns and ammo. Have any of you heard the incendiary wingnut threats hurled against democrats who voted in favor of healthcare, against their children. Imagine what horror will be wrought if democrats take on the financial oligarchs. Our enemies are ruthless and savage. There are no laws. It’s kill or be killed. The predatoclass is either put back in the keep and held accountable for grotesque abuses, cataclysmic failure, wanton profiteering, or some combination of the above. Do any of you socalled experts believe these people will giveup their illgottengain peaceably or without a fight. Think again!!! We (the people) either take this country back, and that will require blood and swet and skin in the game, or we don’t. If we don’t, then woe to us for we are destined to endure an endless “doomloop” bubblebustbailout cycles, and all the terrible costs and suffering that are applicable to that end. If we do, – then the predatorclass is accountable, and must be restrained, (by any means necessary) and put back in the keep!!!!

    There is no middleground. There is no wishy washy response to these threats and this harsh cold reality. The people either stand up against the predatorclass, and demand accountability and justice, or we relinquish our future to neverending doomloop cycles wherein the predatorclass robs and pillages and eventually enslaves the people, or we don’t. If we do, – then buckle Americans, we’re about to enter some turbulence. If we don’t, – then get locked, cocked, and ready to rock Americans, because the predatorclass is bent on stomping all of us into the dust. It’s kill or be killed!!!

  34. When will these guys learn that regulatory nuance is a disaster the people who actually have to figure out a way to execute regulation. I can’t sit there and negotiate for three weeks over what constitutes “reasonable” (or whatever).

  35. A view from Europe± I would like to contribute to the farce by informing you that Mr Caruana, head of the B.I.S, has recently stated that regulation banks will
    result in a shortening of credit, lol

  36. The Fed’s members are elected by member banks. How does one expect objectivity when the appointees are chosen by those they are charged with regulating?

  37. There is a lot of anger here, you chaps. Name-calling and abuse does not build support for a particular point of view.

    I guess that Obama will notice that even the policy geeks dont agree, and assume it is best to be cautious. Which is probably his preference anyway.

    Shame really.

  38. I don’t know about that. Both the CEO’s of the Dallas and Kansas City Federal Reserve banks are arguing that TBTF must end, and end now, or we cannot fix our financial system.

    Let’s just make sure the word gets out and that we demand reporting on these important voices.

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