The Volcker Rule: It’s not happening

February 16, 2010

A few points:

1) The much-hyped Volcker Rule proposal is failing fast in the U.S. Congress. But Paul Volcker himself probably isn’t that surprised. The former Federal Reserve chairman joked he was “just a photo op” even after President Barack Obama’s public embrace of his proposal to limit bank proprietary trading. More evidence that the moment for sweeping reform has probably passed.

2) The hope for any reform at all rests with the U.S. Senate’s new negotiating tag-team of Democrat Chris Dodd, chairman of the Banking committee, and Republican freshman Bob Corker. But Corker says the Volcker Rule isn’t going to be a “major topic” for discussion. And that is probably OK with much of the committee. As one banking industry lobbyist told me, “There is just not a lot of appetite among members of the minority or the majority to add [bank trading limits]. So I just don’t think you’re going to see it.”

3) Increasingly, the Volcker Rule looks more stunt than viable solution. Though Volcker had been pushing it for months, White House advocacy surprised both the Banking committee and banking industry. A poor way to introduce serious legislation in Washington. Lame-duck Dodd, who sees reform as his legacy, hears the clock ticking. A bill not passed by early summer is probably dead for the rest of this election year. His view: The Volcker Rule is a sudden and unwelcome complication.

4) Cynics saw it as a populist, knee-jerk response to the loss of a Massachusetts U.S. Senate seat held by Democrats for more than a half century. Even some Volcker Rule advocates admitted the plan didn’t directly address the regulatory failures that contributed to America’s financial meltdown. And although the proposal was introduced in January with great fanfare by Obama – Volcker standing prominently at his side – Senate Democrats say the creation of a new consumer finance regulator is actually the issue the White House is spending political capital on.

5) It is a reality that highlights the Obama administration’s scant interest in more extreme measures to limit the size of the banking sector or its activities. And if Volcker did harbor any small doubts about that, he shouldn’t any more.

5 comments

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There has to be a limit, and there will be or there may not be a single incumbent elected in November once us taxpayers understand that after Hank Paulson raided the government coffers to save his reputation and his clients money on the back of US pension funds.

Derivatives are not an innovation, they are a party trick that has been used primarily to move wealth from the asset into a fantasy land of algorithms that fail as often as weather forecasts.

Don’t under estimate the populist movements that you like to ridicule as naive, that is how this whole thing started.

Posted by Joe Stafura | Report as abusive

Paul Volcker is the last Chairman of the FOMC with some integrity, overview and guts.

Office holders after Volcker are not worth mentioning as they contributed to the embarrassing mess in this nation’s commercial, financial and “human” environment…. claiming they could not see it coming.

I am surprised that Paul Volcker is willing to put up his hand for some broad outlines of a vague, populist proposal to limit bank proprietary trading…. possibly the least damaging of potential issues to create havoc in any bank – big or small.

The banks too big to fail have grown bigger since March 2008, well assisted by the former and current government while lending to small and medium seized businesses is on the back-burner… otherwise management of these banks would have lost the plot.

And America is suffering while they are financing the banks’ certain bets to short term prosperity when buying treasuries yielding 100 to 400 bps while having a cost close to zero.

Should the Obama-fanatics wish to rein in some buffers to off-set future losses (or the current ones not yet booked due to mark-to-myth rather than mark-to market principles) a simple, easy to administer and control method is to tax say 75% of the margin from the treasury trades or to establish a reserve calculated the same way which cannot be included in the capital adequacy ratios of any bank until dissolved.

But hey, such measure is possible too simple or is it too simplistic for the Wizards of Washington to embark upon.

The stern, precise and non-wavering Volcker when “whipping” markets with a sustainable interest rate policy, thereby avoiding bubbles and excessive, non-productive rubbish, is now siding with a president very similar to the former in terms of anomalies and extremes … maybe somewhat different in nature but distinct contrary to the Volcker doctrine that I learned to respect.

Sad. Really sad.

Posted by Finn Henriksen | Report as abusive

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