By Michael Hiltzik
Mandy Rice-Davies, an exotic dancer who played a peripheral role in the Profumo affair that rocked 1960s Britain — in which a Parliament minister was discovered sharing a mistress with an alleged Soviet spy — won her bit of fame by uttering perhaps the wisest riposte ever about the reflexive disavowals one hears from those caught doing wrong.
Told that one of her high-placed lovers denied ever having met her, she replied, “Well, he would say that, wouldn’t he?”
Those words came back to me as I read the comments filed with federal regulators by bankers, investment big shots and high-priced lawyers pushing back against the so-called Volcker rule. Named after former Federal Reserve Chairman Paul Volcker, who proposed it, this is a provision in the 2010 Dodd-Frank Wall Street reform act designed to prohibit banks from making risky trades for their own accounts.
That practice contributed mightily to the financial meltdown of 2008, when big banks turned out to have made bad bets on all sorts of arcane financial securities and didn’t have the money to cover their losses.
Now that the principle has been enacted into law, it’s up to the Fed, Treasury Department, Securities and Exchange Commission and other regulators to write rules for its implementation. As is customary, they’ve asked the public and industry to give their thoughts on the matter, which are due by mid-February.
The comments from financial institutions almost uniformly predict dire consequences if the Volcker rule is broadly implemented — higher borrowing costs for business, less investment, lower job creation, the loss of banking business to overseas competitors. They tend to hew closely to remarks made by Jamie Dimon, chairman of JPMorgan Chase, in an earnings conference call in October.
“The United States has the best, deepest, widest and most transparent capital markets in the world which give you, the investor, the ability to buy and sell large amounts at very cheap prices,” he said. “That is a good thing. I wish Paul Volcker understood that.”
He would say that, wouldn’t he?
Let’s be clear that nothing in Dodd-Frank generally or the Volcker rule specifically outlaws proprietary trading, which is trading for an institution’s own books. The idea is simply to ensure that such trading bets aren’t done by institutions carrying the U.S. taxpayer’s implicit guarantee, as happens when it’s done by a bank whose deposits are guaranteed by federal deposit insurance or that might be so big or systemically important that it might have to be bailed out if its bets go south.
Because proprietary trading increasingly has involved extremely complex financial instruments under increasingly risky circumstances, it’s only prudent to make sure that you and I aren’t on the hook for rampant cowboyism on Wall Street.
That’s exactly what happened in the crash of 2008. Firms that looked on the outside to be garden-variety commercial banks borrowing from depositors and lending to businesses, such as Bank of America and Citigroup, were going to town with a blank check from the government. Others may not have had such an explicit guarantee, but their tentacles were so deeply wrapped around the financial system that the government felt that their collapse, even if it was from their own stupidity, couldn’t be allowed to happen.
The Volcker rule was designed to restore some of the protections embodied in the New Deal-era Glass-Steagall Act. That act required commercial banks to divest their investment banking arms. (“The House of Morgan,” its prime target, split into the investment bank Morgan Stanley and the commercial bank J.P. Morgan & Co., which is now JPMorgan Chase.) Glass-Steagall was repealed in 1999, enabling the conflicts of interest that ended with the tears of the 2008 crash.
As Volcker put it succinctly in a 2010 interview with the New Yorker: “If you are going to be a commercial bank, with all the protections that implies, you shouldn’t be doing this stuff. If you are doing this stuff, you shouldn’t be a commercial bank.”
The banks claim that too strict an application of the Volcker rule will prevent them from performing legitimate services, such as executing trades requested by customers, by keeping an inventory of securities to ensure their clients get the best price.
Industry critics say such arguments are — to steal a coinage from Newt Gingrich — “pious baloney.” “All this crying about market-making and serving their customers is a smoke screen,” says Dennis M. Kelleher, chief executive of Better Markets, a Washington nonprofit that aims to promote the public interest in Dodd-Frank rule-making and which has pressed for immediate implementation of the Volcker rule. “It’s all about going back to when they could take the upside on any bet they wanted and the taxpayers would take the downside.”
There’s no dearth of industry calculations of the supposed cost of the Volcker rule. One securities industry trade group estimates, for example, that the value of corporate bonds held by investors might drop by $315 billion if the rule is “overly restrictive,” whatever that means.
That sounds like a lot of money, until you calculate the cost of the banks’ unrestricted gambling — leaving aside the $1.5 trillion spent by the U.S. government on bank bailouts and post-crash stimulus programs, the net worth of American families fell nearly 20% the year of the crash, or by as much as $13 trillion. It’s still mired at about the 2006 level. In that context, it sounds like the Volcker rule comes cheap.
The industry’s most laughable complaint is that the proposed rule has become overly complex, running now to hundreds of pages. What the banks don’t acknowledge was that they openly connived to make it so.
While the Dodd-Frank bill was making its way through Congress, they lobbied relentlessly to inject exceptions and exemptions into the Volcker rule. In the give-and-take of the legislative wringer, many details were dumped on regulators to figure out. Don’t let anyone tell you that this doesn’t benefit the financial industry, which is thereby given a second bite of the apple to lobby rule makers, abetted by its pantsfuls of cash. It should go without saying that when a big firm such as Goldman Sachs or JPMorgan Chase calls officials at the Treasury Department or the Fed, they pick up the phone.
The scale of Wall Street’s lobbying effort attests to the profits (and bonuses) at stake. A study by Duke University law professor Kimberly D. Krawiec of records of agency meetings on the Volcker rule show that nearly 94% involved financial institutions, their trade groups and their law firms, with JPMorgan Chase, Morgan Stanley and Goldman Sachs leading the way. Public interest groups, unions and other public advocates — all of whom certainly have an equivalent interest in protecting the financial system from harm — made do with the other 6%.
Krawiec found that entities whose views might be expected to function as a “counterweight” to the industry’s, such as the AFL-CIO and Public Citizen, got 18 meetings with regulatory rule makers from the end of July 2010 to the end of June 2011; JPMorgan Chase alone had 17. Volcker himself had only one. Goldman Sachs Chairman Lloyd Blankfein hit a trifecta in March 201, securing a private meeting with SEC Chairwoman Mary Schapiro, her chief of staff and the agency’s director of trading and markets. And the roundelay of meetings is still going on.
Do you still think the Volcker rule is going to be as tough on Wall Street as it needs to be?
Every time a new regulation comes along, the financial industry claims it will crash the economy. This was the argument the banks used against deposit insurance and the creation of the SEC in the 1930s, and we’d be in a lot worse shape without those reforms. So when you hear the same claim being made, just repeat to yourself: “They would say that, wouldn’t they?”