News Journal: Volcker rule is not what Paul Volcker wanted

Last Tuesday was quite a day in Washington. Two elephant-sized policy questions –the federal budget and the Volcker Rule –were resolved by giving birth to two mice.

I’ll deal with the very modest budget agreement in another column. The Volcker Rule, which is supposed to end proprietary trading by banks, was finally approved by the necessary five federal regulatory agencies after four years and countless thousands of hours of work. They produced a document filled with exceptions, contradictions and foggy language. The major celebrants will be the Wall Street lawyers who have been given the Christmas gift of their dreams.

Don’t pay too much attention to the public whining of the banks that the rule is too tough, that they will suffer, the economy will suffer, that they won’t be able to compete, that –oh, you have heard them whine before. Privately, while some of their lawyers will be working on suits to reverse elements of the rule, most will be joyfully pointing out all the ways it can be easily circumvented.

And read with a large grain of salt all the self-congratulatory claims by Treasury Secretary Lew and others that the rule means we no longer need to worry about out-of-control proprietary trading by too-big-to-fail banks. That just isn’t so.

If you think I’m being unduly cynical, let’s go back to why Paul Volcker originally suggested a rule that would end risky proprietary trading by FDIC-insured banks. He did that only after it became obvious that the 2009 bill I co-sponsored with Sens. John McCain (R-Ariz.) and Maria Cantwell (D-Wash.) had no chance of becoming law. That bill would have, in effect, reinstated the Glass-Steagall Act that had from 1933 until 1999 separated FDIC-insured commercial banks and investment banks. Volcker’s solution was a kind of Glass-Steagall lite rule that would somehow end risky proprietary trading while leaving the big banks intact.

But how do you define proprietary trading? In the middle ages, they asked the same kind of question: How many angels can dance on the head of a pin?

That made it easy for the Wall Street banks, with the help of then-Treasury Secretary Geithner, to water down the Volcker proposal. Then Congress did what it did with so many pieces of the Dodd-Frank Wall Street Reform Act. It avoided dealing with controversial legislation and simply kicked the can down the road to the tender mercies of the regulatory agencies.

Most of what we heard during the 40 months the Volcker Rule was being written by the regulators came from the incredibly effective Wall Street lobbying machine. Articles appeared in all of the major financial publications saying the Volcker Rule would destroy banking as we know it. The underlying arguments were always that Wall Street wasn’t really responsible for the financial meltdown, that if there had been some minor problems the banks had already fixed them, and therefore no major structural changes were needed. The regulators were hearing the same things –in spades. A study by Duke Law Professor Kim Krawiec demonstrated how lopsided the lobbying on the Volcker Rule was. She found that, between July 26, 2010 and July 7, 2011, 93.6 percent of the meetings with commissioners and staff of the five regulators charged with writing the rule were with financial institutions, law firms representing financial institutions, or financial institution trade associations, lobbyists, or policy advisers.

Faced with the London Whale fiasco last year, JPMorgan Chase CEO Jamie Dimon gave us a preview of what Wall Street banks will continue to do when charged with proprietary trading. Deny it. Dimon insisted at first that the whole thing was a “tempest in a teapot,” and wasn’t proprietary trading at all. Who’s to know what’s a hedge, what’s market making (trading on behalf of clients), and what’s trading for the bank’s own account? The paper trails can be inconclusive. Like angels on pins, there is never going to be an answer. It makes no difference the Senate Permanent Subcommittee on Investigations later documented what Chase had done was proprietary trading. Most banks have already closed down their “propriety trading” desks. But what’s in a name? Somewhere down the hall, they will still be doing it. And when caught, an army of high-priced lawyers can do wonders with plausible deniability.

The tattered remains of the rule Paul Volcker envisioned, as promulgated this week, will do very little to stop too-big-to-fail banks from engaging in high-risk trading with FDIC-insured deposits. That will happen only when we establish a strong new Glass-Steagall law that separates commercial and investment banks. The only question is how much damage will be done before then.

Ted Kaufman is a former U.S. senator from Delaware.

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