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December 12, 2013

Reflections on the Finalized Volcker Rule

There’s already been a lot of discussion and purported analysis of the Volcker Rule since it was finalized on Tuesday and there’s assuredly lots more to come.  Unfortunately, much of it isn’t based on the actual rule itself (which few have read); much of it isn’t based on what actually happened over the last 2 years when the proposed rule was being considered (which few were actually involved in); and much of it is self-interested, arguing for points of view regardless of text, content or history.  

While we too will have additional thoughts about the rule and what it means, here are some of our early reflections: 

First, we agree that a definitive position on whether the final is weaker or stronger than the proposed rule may be impossible, but that is not necessarily the right – or only or most important – benchmark.

It should be remembered that the rule wasn’t static from proposal to final.  In fact, there were numerous interim drafts that were significantly weaker versions after the proposed rule and before the final, including very weak versions within that last 2 months that were significantly strengthened.

Second, regardless of what happened from proposal to final, the final is stronger, almost certainly significantly stronger than Wall Street expected – that doesn’t mean their loophole hunting, creating and exploiting lawyers and lobbyists won’t find ways around it, but that doesn’t change the fact that it is stronger than Wall Street expected and certainly way stronger than Wall Street wanted.

Third, as we said in our press release, while details matter (a lot), so do principles and regardless of how the details play out we have to, in our view, repeatedly emphasize the principles embedded/announced in the final rule, raising the bar on the industry and regulators and keeping the pressure on for the rule as it will be implemented to live up to the letter and spirit of the statute banning proprietary trading. 

Fourth, given the statute required 5 regulators and 22 principals to write this rule, it was always going to be a mixed bag with lots of compromises and inevitable ambiguities.  We always knew that the final rule was really going to finalize little and that this would be an ongoing battle with an industry that never says never and never gives up. Literally trillions of dollars are on the line and, more importantly, hundreds of billions in bonuses, so this fight simply will not end. 

Fifth, some of what is going on here is Wall Street’s lawyers and lobbyists trying to defend all their work and billings over the last 3 years as well as to pave the way for continued if not increased billings going forward. The super-smart Wall Streeters still have no idea how the DC influence industry not only plays the game, but keeps the game going, often to enrich themselves and equally often to the detriment of the businesses of the very Wall Street clients they supposedly represent.  

Finally, a lot of what is going on right now is winning the narrative/elite frame of the rule and that’s going to have big implications for implementation and enforcement in the short, medium and long term.  This isn’t just a rhetorical war of words.  It’s like working the refs in a game.  Push ‘em around, badger them, appeal to them, get their sympathy, with the goal of getting them to see the field of play the way you want them to see it and hope they act accordingly.  The success of this tactic is relentlessness.  The Street and their hired guns are experts at this and proponents of a durable, workable Volcker Rule need to be as well.



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