Volker, Volker, Who Can Break the Volker?

The 2008, too-big-to-fail collapse of mega-financial institutions like Bear Stearns and Lehman Brothers was just those extreme players who borrowed money at ratios of debt at 30 or more times the equity that secured those loans. Most of the other big American financial institutions had the same issues, but they were capable of being saved with a massive infusion of taxpayer money to solidify their balance sheets mixed with a pile of euphemistically called “quantative easing” efforts by the Federal Reserve (effectively selling their bad loans to the fed).

The underlying issues that led to the mildest form of fiscal regulation all revolved around these huge institutions’ basically trading for their own accounts. With programmed trading, automated and implemented by super-high-speed computers, these big, bad boyz – wreaking havoc that even The Wolf of Wall Street could not imagine – tilted the playing field entirely in favor of those banks properly equipped. Insider trading was now eclipsed by machines that could respond to or even create market conditions in mini-micro-milli-seconds. As the “recovery” progressed, the once-fat cats returned to financial obesity and just picked up where they left off.

With strong resistance from the GOP, out-voted in both the House and Senate until the 2010 mid-term elections, Congress passed a highly diluted financial regulatory statute (Dodd-Frank) with one provision that held out the faintest ray of hope for this “proprietary” trading that sank the entire nation into financial dust. It was a section that enabled the Securities and Exchange Commission (and other agencies) to create regulations to limit such internal machinations. The GOP used its new-found House majority (from the 2010 elections) to slow the process by underfunding the regulatory agencies charged with this rule-making obligation. But way after the outside time of even the most pessimistic projections, the new rule (the so-called Volker Rule) passed the necessary agency approvals.

“The Volcker Rule refers to § 619 (12 U.S.C. § 1851) of the Dodd–Frank Wall Street Reform and Consumer Protection Act, originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers. Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's own accounts, although a number of exceptions to this ban were included in the Dodd-Frank law. The rule's provisions were scheduled to be implemented as a part of Dodd-Frank on July 21, 2012, with preceding ramifications, but were delayed. The necessary agencies have approved regulations implementing the rule, which is scheduled to go into effect April 1, 2014.” Wikipedia

Wall Street was waiting in the wings for its carefully-crafted counterattack(s). Sure the big boyz could fire a few rounds, but everybody hates these behemoths so much that, well, they decided to deploy a different approach: “The banks have fired their first salvo in what could soon turn into a war of litigation over the Volcker Rule… As expected, the American Bankers Association, an industry trade group, filed a motion in federal court on [December 24^th] in Washington seeking to quickly suspend one part of the Volcker Rule, which was officially completed [several] weeks ago… The trade group claims 275 small banks will suffer an imminent $600 million hit to capital and make them less likely to lend to consumers and businesses.

“Though the current dispute centers on an obscure and complex investment product, the association’s lawsuit could become an early test of how much the industry can successfully push back against the Volcker Rule. The rule was devised to stop regulated banks from speculatively trading with their depositors’ money and other funds in an effort to avoid some of the problems that led to the bank bailouts in the wake of the 2008 financial crisis…

“At the heart of the bankers’ group lawsuit are instruments called collateralized debt obligations, the instruments that helped stoke the financial crisis. The final Volcker Rule contained language that, to many in the industry, seemed to prohibit banks from holding C.D.O.’s… The banking association says the Volcker Rule unfairly targets a special type of C.D.O. held by smaller banks. These instruments are made up of so-called trust-preferred securities, a cross between a bond and a stock that banks issued to increase their capital.

“Crucially, accounting rules have shielded banks from taking a full hit on these soured investments. But, now, the banks could lose that shield if the Volcker Rule forces them to offload the C.D.O.’s. As a result, the banking association argues that the banks might have to take big write-downs in the next few weeks that would substantially dent their capital.” New York Times, December 24^th.

The Wall Street hammers and chisels are out, destined through strategic forum and issue shopping to keep these regulations from being actively implemented for as long as possible, possibly a decade or more as cases wind their way, provision after provision, case after case, up to the U.S. Supreme Court. It’s the biggest baddest boyz (and their little bank minions) against the best interests of the vast majority of Americans. Wall Street figured that the issues are too complex for ordinary voters and ignorant Congress-people to understand, so they won’t care. But if you enjoyed the Great Recession, you will really love the next crisis which Wall Street seems destined to foment. After all, solid companies and most Americans cherish stability, but Wall Street makes all of its billions based on market volatility.

I’m Peter Dekom, and as our educational standards continue to plummet, it becomes easier and easier for the banks to tear up the regulations that we really need to protect us against the Bank of Evil!