The Volcker Rule under threat
Kevin Drawbaugh has obtained a letter from Spencer Bachus, the probable new chair of the Financial Services Committee, to Tim Geithner. And it turns out that Bachus is no fan of the Volcker Rule:
If the Volcker Rule’s prohibitions are expansively interpreted and rigidly implemented against U.S. institutions while other nations refuse to adopt them, the damage to U.S. competitiveness and job creation could be substantial…
I strongly recommend that your study of the Volcker Rule take account of how trading activities fit into the core business plan of global banks, as well as the consequences for U.S. banks and the banks’ clients of prohibiting those activities in the U.S. while they continue to be permitted everywhere else in the world.
This might well presage a significant weakening of the Volcker Rule, which curtails banks’ proprietary trading and tries to limit their growth, and was introduced into Dodd-Frank very late in the game, reportedly over the objections of the more technocratic members of the White House economic team, including Geithner himself. You might recall Geithner standing well off to the side, with a miserable expression on his face, the day that Barack Obama announced the rule.
Finally, preserving the flexibility of the Federal Reserve and the other U.S. banking agencies to design and calibrate a leverage constraint for U.S. financial firms is essential to enable the agencies to successfully negotiate a robust international leverage ratio that works in all the major jurisdictions and does not leave U.S. firms at a competitive disadvantage to their foreign peers.
Clearly, Geithner is sympathetic to arguments which worry about putting US banks at “a competitive disadvantage” globally: he’s made them himself. And equally clearly, the Volcker Rule is little more than an expression of intent at this point: if Geithner and Bachus decide to render it toothless, they almost certainly can.
But of course the explicit thinking behind the Volcker Rule is that there are good and bad ways for a bank to become globally competitive. The bad ways involve taking unnecessary risks with taxpayer money. The point of the Fed’s discount window is to provide a funding source for banks to make loans into the broad economy, not to provide a near-zero cost of funds for proprietary bets. And no bank in the world will deliberately cross-subsidize its lending operations with its prop-trading profits.
Shuttering prop desks, writes Bachus, “will cause these firms to be less profitable”. Well, yes. That’s a feature, not a bug. We don’t want financial institutions to be profitable: they’re middlemen, and their job is to help capital flow to where it can best be put to work, rather than to retain as much of that capital as possible for themselves, in the form of profits and bonuses.
But I fear that Geithner is sympathetic to Bachus’s points. Could this be the beginning of the end of the Volcker Rule?