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Volcker Rule Made Meaningless by Abundant Exemptions

Posted on Dec 18, 2013
AP/Bernd Kammerer

By Nomi Prins

(Page 2)

Breaking It Down

The proposed rules tally 892 pages, of which the beginning contains exposition and outlines the crux of the rule prohibiting certain proprietary trading and hedge and private equity fund activities.

The exclusions kick in on page 55. Through page 79, we get their general aspects, with more specific details following on page 80. We wander through Underwriting Exemptions from pages 80 to 139, followed by a long section on Market-Making Exemptions from pages 140 to 317.

Then, we get a bunch of permitted hedge fund related activities that nearly negate the idea of the Volcker Rule altering the relationship of big banks to big hedge funds from pages 317 to 361. From this point, we meander through permitted trading in certain government and municipal securities (including in foreign bonds). There are a few antiquated categories that seem open to more lobbying through page 388.


Square, Site wide

Permitted Trading on behalf of clients gets 10 pages, as does permitted trading by a regulated insurance company. Permitted trading activities of a foreign banking entity get 23 pages.

Then we come to a section that sounds sort of regulatory, but is too obtuse to tell from pages 433 to 447. After a few pages of definitions as to what constitutes “High-Risk Asset” and “High-Risk trading strategy,” we get one page—one page!—on trading that could “Pose a Threat to Safety and Soundness of the Banking Entity or the Financial Stability of the United States.”

Another section of loopholes begins with covered fund activities on page 463. This is the stuff that allows banks to trade almost anything anywhere as long as it’s named in such a way as to avoid suspicion. Section 10 begins with prohibitions on banks buying or having certain relationships with a “Covered Fund.”

Pages 500 to 637 provide lists of exemptions to the above such as foreign public funds, insurance company separate accounts, loan securitizations (which were central to the subprime crisis), derivatives on loan securitization (ditto), venture capital funds (another word for private equity funds) and credit funds (which can hold all sorts of AIG-type credit derivatives).

In Section 11, we get another laundry list of permitted activities in conjunction with organizing covered funds, including “permitted risk-mitigating hedging activities” (and aren’t they all?) from pages 638 to 766. These also include foreign funds and insurance companies. To cap it off, we get some obligatory legal jargon about how to comply with whatever weakened rules remain from pages 767 to 882. C’est tout.

Something Is Not Always Better Than Nothing

For those people who think the Volcker Rule is a swipe at the banks and will reduce risk in the system, I urge you to reconsider. The Volcker Rule (and Paul Volcker, for whom it’s named) might have had good intentions, but the form it has taken, and was destined to take as I’ve written before, is a placation. It is not substantive reform, or even the right path.

Only a resurrection of Glass-Steagall will truly reduce the risk mega-banks pose to our economic lives. The multiple decades of regulation assassination, the combining of financial services from insurance policies to our pension funds, the epic leverage in the banking system as part of the high-stakes game of global profit, the enabling of the derivatives market to reach many times the world’s GDP, disproportionally controlled by the Big Six U.S. banks—are all time bombs of financial devastation.

This immense power in the hands of the Big Six banks and their leaders is dangerous to all of us, whether we believe that something like the Volcker Rule or Dodd-Frank represents true reform or not. Without curtailing that power, through a full separation of deposits and loan taking services from any other kind of trading and security creation engine or other form of financial service—the intent of the original Glass-Steagall Act—we are not safe. There will be bigger and broader crises.

Our apathy is exactly what the banks, their CEOs, their lawyers and their lobbyists count on. They depend on citizens getting bored and glassy-eyed when a financial term is mentioned and turning to stories about Miley Cyrus twerking or Kim Kardashian’s bikini bod instead. They rely on journalists not reading between the lines or even tabulating the lines. They bet that most legislators (excluding Sens. Elizabeth Warren and Bernie Sanders) will focus anywhere else, because they can out-complicate the lingo. They are confident that the population will continue to furnish them chips on the global betting table. That is our current system. That is the system that must be abolished through the strict re-employment of Glass-Steagall. We—all of us—have too much at stake to be blindsided by anything else.

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