The following is an excellent article from the December 30, 2013 issue of Time magazine on page 24 written by Rana Foroohar titled “Commentary/ The Curious Capitalist: Economy and Policy: Volcker Rule Is a Puzzle That Will Take Years to Understand” and I quote:
“Volcker Rule Is a Puzzle That Will Take Years to Understand”
By Rana Foroohar Dec. 10, 20130
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Former Fed Chair Paul Volcker
The Volcker Rule, which will limit the way in which banks can conduct risky trading operations using federally insured funds, is due to be adopted today. Is this a step in the right direction on banking reform?
Yes. Does it end the Too Big To Fail Problem? No. As always, there’s plenty of fine print in the draft rule and lawyers will be parsing it (and banks will be challenging it) for years to come. But FDIC Vice Chairman Thomas M. Hoenig, a reformer who supports the rule, summed it up well in his statement today: “The Volcker Rule is often described, accurately, as being highly complex. However it is complex because SIFIs [systematically important financial institutions] are highly complex, engage in a broad range of complex trading activities and also, because of the number of exceptions to the Rule that the largest banks have been granted regarding these trading activities.”
The word “exceptions” is crucial. The rule as it stands right now has strengthened some of the language around how banks trade, and exactly what constitutes a legitimate “risk” which can be mitigated with hedging. That should make it somewhat tougher to do the sort of trades that got the London Whale into such trouble. But to be clear, the banking lobby was able to get loopholes written into the law that make it possible to continue that sort of proprietary trading. They just have to define the portion of their portfolio and the risks being hedged in a way that’s believable to regulators.
Which opens up a lot of grey territory for lawyers. The truth is that it will take years to know exactly how effective this version of the Volcker Rule will be in mitigating risk within the banking system, and it will depend on how much time, money, technology, and legal services the banking industry throws into keeping the most profitable portion of their business going (my bet — a lot – and they already spend half a billion dollars a year on it). It will also depend on how well regulators making 5 figures a year are able to police financial wizards making 7 (a discrepancy which continues to worry me).
What I’d love to see is not only a Volcker rule that prohibits prop trading outright, but also tougher capital holding requirements for banks. It’s a little known but important fact that in the years around the financial crisis of 1929 and the Great Depression (from 1929 to 1932), lots of small and regional banks went under, but no major New York bank did. Why? Because these market makers were holding between 15 and 20 % equity capital on their balance sheets — about ten times more than the average today. Prohibiting prop trading would go a long way toward lowering those ratios.
Read more: Volcker Rule Is a Puzzle That Will Take Years to Understand | TIME.com http://business.time.com/2013/12/10/volcker-rule-is-a-puzzle-it-will-take-years-to-understand/#ixzz2oavVtRqO”
(I WOULD THINK, AFTER THE 2008 FINANCIAL DISASTER, WHICH HAPPENED UNDER PRESIDENT GW BUSH’S ADMINISTRATION, WHICH RESULTED IN THE $700 BILLION TARP BANK BAILOUT THAT PRESIDENT OBAMA WENT ALONG WITH, THAT SOMETHING WOULD HAVE BEEN LEARNED. BUT AFTER READING THIS EXCELLENT ARTICLE AND THE FACTS DIVULGED, NOTHING HAS CHANGED, DUE TO THE BIG BANK LOBBY EFFORT TO KEEP ‘BUSINESS AS USUAL.’ I BELIEVE VICE CHAIRMAN OF THE FDIC, THOMAS HOENIG, IS RIGHT IN THE FACT THAT THE BANK REGULATIONS MUST BE ABSOLUTELY STRENGTHENED AND BANK CAPITAL MUST BE RAISED TO AT LEAST 15 TO 20 PERCENT. I BELIEVE THE COMMERCIAL BANKS MUST BE SEPARATE FROM THE INVESTMENT BANKS, WHO WANT TO DEAL WITH HEDGE FUNDS, PRIVATE EQUITY AND TOXIC DERIVATIVES. UNLESS THIS IS DONE, I BELIEVE WE WILL HAVE ANOTHER BIGGER BUBBLE BURST MUCH, MUCH WORSE THAN 2008.
LaVern Isely, Overtaxed Independent Middle Class Taxpayer and Public Citizen and AARP Members