Join 3,440 readers in helping fund MetaFilter (Hide)


"...the best form of democracy we’ll have in this process."
November 4, 2010 10:31 PM   Subscribe

Are you ok with your bank playing roulette with your deposits? Yes? No? Well, today is the last day to speak up and be heard!

According to the Federal Register (linked above), the Volcker rule (previously) (written into the Dodd-Frank Wall Street Reform and Consumer Protection Act) would restrict commercial banks when engaging in proprietary trading and "maintaining certain relationships with hedge funds and private equity funds".

Why is proprietary trading such a problem? Well, to hear the rule's namesake, Former Federal Reserve Chairman Paul Volcker, describe it, "such speculative activity played a key role in the financial crisis."(link) This view is support by research (pdf),
"...the Political Economy Research Institute at the University of Massachusetts pointed out 'risky proprietary investments by investment banks, along with trading for clients whose decisions were influenced by these banks, was one of the main forces that sustained upward pressure on securities prices in the bubble…Indeed, by running large trading books, banks had inside information on client trading patterns and could use that information to front-run, and thereby help sustain market trends.'”
American Public Media's Marketplace compared such an arrangement as being similar to running a casino out of the back of your house (yt) with banks gambling their depositor's money. The fear is, as it was before, when one casino loses (and one will, sooner or later) the losses are so big that the whole system collapses.

Now, the language in the Dodd-Frank Act would definitely limit bank's private-fund investments to 3% of capital. The issue being heard is how to enforce the limit, how to regulate. Former IMF Chief Economist Simon Johnson notes that there is a difference of opinion within the group being tasked to determine enforcement, the Financial Stability Oversight Council (FSOC). "On one side is the view that compliance should be monitored only through periodic existing supervision and some spot checks...that the industry will follow instructions and only needs a moderate degree of broad-brush enforcement." Meanwhile, "[o]n the other side is the view that enforcement should be more assertive and based on real-time access to detailed trading data. The thinking here is that regulators would need the ability to look at transaction data to understand what is really going on." Johnson argues, "Why not do both?" Volcker himself seems to agree, with some noting his worry that "narrow or prescriptive rules would invite gamesmanship on the part of banks and could allow firms to evade the rule's intent".

That same WSJ article points out that, "[a]lready, some banks and their lobbyists are seeking to sway regulators and encourage them to narrowly define certain types of trading activities, according to government officials." It doesn't stop with trying to sway regulators. Only a few days ago, JPMorgan Chase signed a deal to acquire a controlling stake in Gavea Investimentos, a $6 billion hedge fund founded by the former head of the central bank of Brazil. (link) Such behavior in the face of impending regulation might be explained by the close associations the financial industry has with the US Legislature. For example, Alabama Republican Spencer Bachus who, back in July, "unsuccessfully sought to amend the bank reform legislation with a provision that would have prohibited the Volcker rule’s implementation unless other countries adopted similar measures. Bachus, who raised $218,000 in 2009 and 2010 from the securities and investment industry, is likely to push to regulators to limit the Volcker rule’s impact."

Today, in the aftermath of mid-term elections, Bachus is considered to be the a leading candidate for chairman of the House Financial Services Committee. This may help explain why Bachus feels empowered enough to fire off a letter to the FSOC, asserting that the Volcker rule will “impose substantial costs on the American economy and market participants” with “doubtful” benefits. “Depending on how US regulators choose to implement it, the Volcker rule may spark a mass exodus of clients from US banks to banks based abroad”. The article also notes that Mr Bachus also expressed concern that shareholders of Goldman Sachs and JPMorgan Chase will be hurt because the banks will be less profitable. Now, there is no guarantee that Bachus will chair the House Financial Services Committee, but the alternative candidate seems no more inclined to support stronger regulation.

But sorting all of that out is will take time. In the meanwhile, November 5th is today and it's the last day for American citizens to voice their opinion on how tough the Volcker rule should be. Mike Konczal, a fellow at the Roosevelt Institute, exhorts citizens to write in, "You may not have a lobbying staff, you may not get your calls returned from Senators within minutes, you may not be running attack ads through slush funds connecting a dozens front groups, but you can have your voice heard right here in this comment period." Clicking right here will take you to the proper comment page.
posted by Hypnotic Chick (29 comments total) 8 users marked this as a favorite

 
Fuck Spencer Bachus. I'd have voted against him gladly Tuesday if he hadn't been running unopposed in the single most conservative district in the United States (and if frivolous write-ins didn't create unnecessary headaches for pollworkers). I've never been more satisfied to leave a Scantron bubble blank.
posted by Rhaomi at 10:45 PM on November 4, 2010


compliance should be monitored only through periodic existing supervision and some spot checks...that the industry will follow instructions and only needs a moderate degree of broad-brush enforcement

This is probably true, if the downside for noncompliance is sufficiently large relative to the incentives for doing so. If it's a wrist-slap, then no, of course it won't work.

I've seen companies spend a lot of time and effort to take regulatory compliance seriously, but in every case where I've seen it done right, it's always because they have a lot of motivation to do so. Either because of straightforward punishment-avoidance, or because noncompliance would create ugly liability situations, typically. Compliance is always a cost center, so it has to be justified in some way.

You can avoid the need for constant outside monitoring, and the inevitable system-gaming that it would invite, if you make the penalties for noncompliance harsh enough and couple it to some sort of random inspection/audit schedule.
posted by Kadin2048 at 10:59 PM on November 4, 2010 [3 favorites]


We need a constitutional amendment to strip corporations of personhood.
posted by boo_radley at 11:00 PM on November 4, 2010 [11 favorites]


PUT EVERYTHING ON RED

LET IT RIDE BABY!!!
posted by Avenger at 11:04 PM on November 4, 2010 [2 favorites]


I'm reading through this, but I'm missing where I should send my comments, or is there a form?
posted by Hactar at 11:08 PM on November 4, 2010


@Hactar,

The last link.

Although at this point unless you have a suitcase full of cash good luck changing anything in this government.
posted by dibblda at 11:12 PM on November 4, 2010


I'm beginning to feel that America would've been better off if we'd let the whole banking system collapse in late '08. After the "recovery", we're back to the bank system status-quo with no guarantee that it still won't all do the domino fall while millions more Americans are unemployed or losing their homes or generally worse off (or all of the above). And the combination of Old Skool Republicans preventing any real regulation of the banking system from taking place AND the Tea Party Poopers blocking any future bailout is almost a guarantee of Economic Armageddon. Sleep well.
posted by oneswellfoop at 12:15 AM on November 5, 2010


Well the recession pretty much solved this problem for me. The banks no longer have any of my savings with which to play roulette. Pity is that neither do I...
posted by three blind mice at 12:50 AM on November 5, 2010


I'm beginning to feel that America would've been better off if we'd let the whole banking system collapse in late '08.

Exactly. Instead, the banks and their thieving senior executives have gone on their merry way. Take a look at financial institution contributions to Obama and McCain, last election. Does that tell you something? Starting with Clinton, through Bush's tragic years, and now even with Obama, we have "justice lite" for bankers.

For instance, how many people are aware that when the housing crisis started there was proposed legislation on the Hill to give homeowners in trouble the power to reorganize their debt, like the banks and other corporations get to do. Guess who lobbied hard to see that that bill never saw the light of day? The banking industry.

Look, we're stuck with these thieving institutions until we stop giving them our money. Put your money in a Credit Union. I don't think that will happen, en masse, because Americans are just too damned stressed about other stuff; they think "everything is going to be alright" once we get through this challenge, after Obama, Romney, Ron Paul (pick your politician) saves us. Get over it, America! Get down to your local megabank and take the simple action of depriving those bastards of the money they use to invest in their nefarious schemes.

It's beyond me how people continue to feed the monster that is slowly bleeding them dry. Banks are not your friend!. They want your money so that they can get more Fed money on the float to make loans - loans that are designed to profit them, not you. It's a flimflam game, with the FDIC underwriting the gaming table.

So, until Americans decide to stop feeding the monster, they have nobody but themselves to blame. There are alternatives to the large commercial criminal banks. Run, don't walk, to your local credit union and transfer your funds, tomorrow!

Does anyone think that stopping the legislation in question will change anything? Wake up! It won't. As long as you feed the banks, they will continue to be able to pay off policy makers. This is a no brainer.
posted by Vibrissae at 1:05 AM on November 5, 2010 [5 favorites]


The comment form in the last link required I submit the name of my organization. Am I supposed to be part of an organization in order to comment? I simply said I am a citizen.
posted by tommyD at 3:43 AM on November 5, 2010


boo_radley: We need a constitutional amendment to strip corporations of personhood.

While I agree that corporations have too much power, I'm not sure that removing their legal personhood would be the best solution: corporations wouldn't be able to enter into contracts, we wouldn't be able to sue corporations...corporations wouldn't be able to own property. The Wikipedia article gives a fairly good summary of why we have legal personhood.

Vibrissae: Does anyone think that stopping the legislation in question will change anything? Wake up! It won't. As long as you feed the banks, they will continue to be able to pay off policy makers. This is a no brainer.

The legislation in question restricts proprietary trading, so judging by the rest of your post you should support it :)
posted by Infinite Jest at 3:59 AM on November 5, 2010


My bank (a credit union, actually) and all other Canuckistani banks are governed by "the rule of law". You guys should try it some time...
posted by sporb at 5:37 AM on November 5, 2010 [1 favorite]


My bank (a credit union, actually) and all other Canuckistani banks are governed by "the rule of law". You guys should try it some time...

Way overrated. We prefer banks that steal cars, steal homes and commit tens of thousands felonies a day and shrug it off as minor paperwork problems. The rule of law is for the little people.
posted by ryoshu at 7:03 AM on November 5, 2010 [1 favorite]


And the combination of Old Skool Republicans preventing any real regulation of the banking system from taking place AND the Tea Party Poopers blocking any future bailout is almost a guarantee of Economic Armageddon.

The advantage to the Tea Party approach is that, once the big institutions truly do fail, they're gone, and they're not doing damage anymore.

The combination of lax regulation and bailouts on demand is the surest recipe for financial Armageddon ever written.
posted by Malor at 7:15 AM on November 5, 2010


I'm fine with the banks playing roulette with my money.

On the other hand, I have a feeling that the FDIC isn't.
posted by schmod at 7:31 AM on November 5, 2010


Uhm canadian banks have prop trading arms. Indeed one of my buddies just got moved from NY to Toronto precisely because of the changes to prop trading in the US. But hey - stick with the smugness - that's cool.

Volcker Rule is a good thing, but maybe I'm just too cynical but almost any implementation of it will have loopholes that banks will exploit. Just too much incentive to keep doing this.

I do think "playing roulette with your bank deposits" is incorrect - since it is mostly shareholder money, not funds from the regulated banking units that are used in prop trading. And unless you bank with the top 4-5 banks, your bank isn't prop trading anyway.

But this should be the price TBTF banks pay - a permanent decrease in both risk and return.
posted by JPD at 8:02 AM on November 5, 2010


Also even the die hard conservatives in my office were embarassed by Bauchus' explanation for why Volcker enforcement needs to be very very lax. Hell Goldman is notorious for damaging their clients with their prop desk.
posted by JPD at 8:03 AM on November 5, 2010


The Marching Farmers of the Apocalypse are on record as opposing bank roulette.
Free-silver craps? That's a totally different issue.
posted by ahimsakid at 8:09 AM on November 5, 2010 [1 favorite]


almost any implementation of it will have loopholes that banks will exploit. Just too much incentive to keep doing this.

This is why the entire concept of Too Big To Fail is, itself, doomed to ultimate failure. These guys are way smarter than anyone else, and we have to get them regulating themselves, because we're not smart enough to do it. And the only way to get them doing that is absolutely never, ever bailing them out, no matter what.... and, perhaps, making individual people in those corporations more responsible for their actions than corporate actors usually are.

Passing regulations after the financial system blows up, and bailing out the bad players, just about defines counterproductivity.
posted by Malor at 8:12 AM on November 5, 2010


Passing regulations after the financial system blows up, and bailing out the bad players, just about defines counterproductivity.


the real problem is that over time memories shorten and motivations get forgotten. If people had remembered why we had the regulatory reforms in the 1930's we never would have allowed the attriction that occured from 1973ish to 2006 happen. We had rules to deal with this, we just forgot about them or got rid of them.

These guys are way smarter than anyone else no really they aren't. In fact they are dumber then everyone else - that's why they require the amount of capital they need - which is why they have the crazy asset- liability mismatches that led them to be so susceptible to general financial distress. Really smart people make 10% ROEs with no leverage. Prop traders make 20% ROEs with 30 turns of leverage. That's the problem - these guys are dumb but don't realize it. Watch over the next five years as these new prop trader run hedge funds fizzle mightily.
posted by JPD at 8:24 AM on November 5, 2010


Every time I read something like this, I think "bring back Glass-Steagall". It's not going to happen, but I seriously doubt it's a coincidence that it took us about ten years after we dismantled it to completely wreck our financial system.
posted by immlass at 8:43 AM on November 5, 2010


almost any implementation of it will have loopholes that banks will exploit.

As I understand it, this is the problem. And as Malor points out, the bankers are extremely creative and very smart. All of this goes to why Volcker has been arguing for the regulations to be written vaguely:
Volcker told the Senate's banking committee it was entirely ­possible to define banks' "proprietary trading", quipping that risky financial activity was "like pornography: you know it when you see it". (link)
posted by Hypnotic Chick at 8:43 AM on November 5, 2010


Volcker wants the rule written in a principles based way, whereas traditionally in the US regulation is perscriptive. Personally having seen how principles based regulation by the FSA in the UK has been abused by the investment banks, I would prefer something perscriptive and draconian.
posted by JPD at 8:49 AM on November 5, 2010


That's not stupid. That's not stupid at all.

Why? Because they know, if they blow up their companies, we'll bail them out. So of course they're running massive leverage, because they get 20% this year, and then don't have to eat the losses later. Privatized profit, socialized risk.

That's what Too Big To Fail means -- divorcing the banks from the real consequences of their actions. The system as a whole will get as stupid and short-term as it possibly can.

Systems aggregate individual behavior, and if the system rewards foolish behavior by individuals, it will itself become stupid. That's what Too Big To Fail does. On an individual basis, it becomes smart to be an idiot. Expecting health and prosperity to emerge from something that dysfunctional and rotten strikes me as....well, let's just say rather optimistic.
posted by Malor at 8:49 AM on November 5, 2010


G-S in and of itself wasn't the main domino to be honest, there were plenty of other 30's era regulations that got ignored or worked around that were much more problematic.

I've have also heard that the OCC (comptroller of the currency - aka the bank regulator) was essentially shot down by politicians anytime they tried to get aggressive with the banks.
posted by JPD at 8:51 AM on November 5, 2010


But when they made those bets they never expected to be bailed out if they went wrong - they never thought they had a put to the government.

Today, yes now that they know they can be bailed out so you are absolutely right. The other big change that happened was the wholesale entry of thrid party equity capital into the investment banks from 1980-on. It used to be if a trading desk blew up it was partners capital at risk, now its the shareholders. That changes a lot. Epicurean Dealmaker wrote a good series on this change.
posted by JPD at 8:54 AM on November 5, 2010


JPD - I can't speak to the regulation of the proprietary trading functions of the banks, but I can tell you that the OCC was working actively against the public's interest in regards to the closer-to-the-ground problem of predatory lending.

Maybe I'm being to pessimistic (or perhaps I don't understand the structure of the agency), but I find it hard to believe that the OCC would strongly regulate the banks under the circumstances.

btw - I guess you can speak to the intelligence of the bankers better than I can. My understanding was that these were generally guys plucked out of the Ivy League, but I guess I shouldn't make assumptions. On the other hand, this seems plausible, and yet consistent, with that understanding.
posted by Hypnotic Chick at 9:11 AM on November 5, 2010


predatory lending and the safety of the banking system are too discrete things though. Also that was the OCC defending its turf to be the sole regulator of banks. More complicated then Spitzer makes it out to be. Also that could still be consistent with the narrative that the OCC got politicized
posted by JPD at 9:40 AM on November 5, 2010


Not that this is a complete surprise, but Stiglitz is calling for jailitime.
posted by symbioid at 12:45 PM on November 5, 2010


« Older Listening to Rap for the First Time, with a Book C...  |  Enter indoor parkour.... Newer »


This thread has been archived and is closed to new comments