The Volcker Rule prohibition on high-risk, speculative proprietary trading at taxpayer-backed banks is a critical pillar of financial reform. It is targeted at preventing another catastrophic financial crash like 2008 and eliminating the reckless, get-rich-quick, bonus-driven gambling culture that infected banks’ dangerous activities and warped priorities in the years before that crash. The Volcker Rule prohibited both direct inside-the-bank and indirect outside-the-bank (via external funds) proprietary (“prop”) trading to close those Wall Street gambling casinos.
Unfortunately, on January 30, 2020, the five financial regulatory agencies charged to implement and oversee the Volcker Rule proposed substantial changes that would undermine the federal prop trading ban and its objectives by opening more loopholes that allow Wall Street’s biggest taxpayer-backed banks to again hold risky investments and engage in substantial risky trading. This is being done by changing the key definition of ‘covered funds’ and related aspects of the Volcker Rule, which collectively may allow banks to invest in funds outside the bank that engage in prop trading. These changes would allow banks to do indirectly what they are prohibited from doing directly.
Fortunately, a number of public servants at the Volcker Rule agencies have dissented from this deregulatory action and identified the dangers involved in facilitating Wall Street’s return to the prop trading culture that contributed to the 2008 financial crisis. We compiled the published Dissenting Views on the 2020 Volcker Rule Covered Funds Proposal, which is also available for download at the bottom of this page. Even a cursory read of these dissents demonstrates all too clearly that the agencies’ renewed zeal for deregulation and deference to the largest Wall Street banks is putting us on a path to yet another financial crisis, which, ultimately, will affect every working person in the United States.
Note also that, last year, the regulators already opened up a series of other loopholes regarding direct, inside-the-bank proprietary trading by finalizing definitional changes to the Volcker Rule, along a with deferential ‘presumptions of compliance’ for market-making and other trading activities that can easily mask prop trading. Combined with the recent proposal, the Volcker Rule ban is in danger of becoming Swiss cheese, full of expansive loopholes that Wall Street will exploit to boost their profits while endangering the financial system and taxpayers.
Supporters claim the proposed changes are mere ‘simplifications,’ ‘clarifications,’ and ‘streamlining.’ Make no mistake: They are not. They go to the core of the scope and effectiveness of the Volcker Rule ban, impairing if not defeating its statutory purpose and objectives. Regardless of the stated reasons, there’s no denying that these changes are what Wall Street’s biggest banks have lobbied relentlessly for 10 years to obtain. This is an example of Wall Street once again successfully privatizing its trading gains in good times, but socializing its eventual and inevitable losses by passing the losses onto the U.S. taxpayers.