The ink is not even dry on the new Volcker Rule, designed to stop investment banks from speculative trading for their own gains and limits their ability to invest in hedge funds. But Wall Street and its bankers are surely starting to look for ways around the rule, which was finalized last week and created after the financial crisis as a way to limit banks’ participating in high risk strategies.
Banks, of course, are seeking exemptions, loopholes and new ways to interpret the rule, rather than designing ways to fully comply with it, according to news reports.
Why are all the Wall Street lawyers and lobbyists frantically working on trying to eliminate or reduce the impact of the Volker Rule? It’s simple. Bank executive compensation depends on the profits they reap from speculative trading.
The new regulations will ban banks from proprietary trading, and prevent them from owning over 3% of hedge funds and private-equity funds.
Banks fear that the rules could cost them billions of dollars by making it more difficult to engage in activities that are permitted under the regulation, such as market-making, underwriting and hedging against risks. Expect the lawyers to go through the proposals to see what could be struck down in court.
Since the passing of the Gramm-Leach-Bliley Act in 1999, banks, brokerages and insurance companies could act in consort under one large roof. That law, which repealed restrictions that prohibited such alliances between disparate financial institutions, in place since the Great Depression, allowed banks to act more like speculative hedge funds than lenders of capital to businesses and consumers.
Many believe that the financial crisis of 2008 largely resulted from Gramm-Leach-Bliley, which allowed banks to take 40–1 leverage and enormous risks with other people’s money. Before the financial crisis, that level of risk was typically associated with private investment pools like hedge funds, not global, publicly traded financial institutions such as Lehman Brothers and Bear Stearns.
The Volcker Rule, a centerpiece of Dodd-Frank financial reform law, has gray areas and loopholes. You can bet the house that investment bankers and their attorneys will spend the coming weeks and months looking to discover ways to take advantage of any weaknesses.
“The rule, which aims to draw a line between everyday banking and risky Wall Street activities, has its limits,” wrote Ben Protess and Peter Eavis last week for the New York Times. “For example, the regulation leaves it largely up to the banks to monitor their own trading. Some critics of Wall Street also wanted chief executives to attest that their bank was actually in compliance with the rule, not just that it was taking steps to comply.”
“And in another concession to Wall Street, regulators will delay the effective date of the rule to July 2015,” Protess and Eavis reported. “Until then, bank lawyers are expected to scour the rule for loopholes and to consider bringing lawsuits against the regulators.”
“While outlawing proprietary trading, the rule allows banks to continue buying stocks and bonds for their clients – a process known as market making – and to place trades that are meant to hedge their risks,” Protess and Eavis reported. “But the line between proprietary trading and these more legitimate practices is blurry at best.”
“The rule also allows banks to do proprietary trades in bonds issued by governments,” they wrote.
Wall Street’s coming drive to gut the Volcker Rule will show that bankers have yet to learn the lessons from the financial crisis. Despite the Volcker Rule, Wall Street remains thirsty for risk and exorbitant executive pay. Securities regulators must stand firm against Wall Street and work to protect the American investing public by making sure that Wall Street does not abuse the Volcker Rule.