From the comments, on Dodd-Frank

by on December 11, 2013 at 4:06 am in Economics, Law | Permalink

This is on the Volcker Rule:

My own view (and I’m a banking lawyer) is that the ban on proprietary trading will have an immaterial effect on the asset size of banking organizations. It might reduce their complexity.

An overlooked issue is that Volcker applies throughout the banking organization. That is, the ban on proprietary trading is not limited to the federally insured depository institution and restricts the activities of all of the affiliates of the depository institution. That’s a dramatic expansion in scope, with questionable policy justifications.

Another overlooked issue is that Volcker also bans investments in certain types of investment funds. Some think this is simply a ban on investments in private equity and hedge funds that is intended to avoid regulatory arbitrage around the proprietary trading restrictions. The statutory definition of covered funds was sloppy, and so the covered fund restrictions are actually much broader – and without any apparent policy purpose. This is particularly a problem for foreign banking organizations, as it looks that Volcker will have a broad extraterritorial scope.

To me, one of the more interesting aspects of Volcker is its implications for administrative law. There are many who would prefer that Congress delegate less to the administrative agencies and instead legislate with particularity. The Volcker experience suggests that might not always work well. The statute defines “private equity and hedge fund,” “proprietary trading,” “solely outside the United States,” etc. with particularity, but those definitions are generally not well-connected to the underlying policy concerns. The statutory language really left the regulators with few options to salvage a good and sensible rule. We probably would have been better off had Congress deferred more to the agencies here.

Finally, as a general matter, the difference between “security” (subject to the proprietary trading ban) and “loan” (not subject) probably isn’t a distinction that matters when it comes to the safety and soundness of banking organizations. Stepping back a bit, it’s hard to imagine what, why and how Volcker is up to.

Steve Sailer December 11, 2013 at 4:09 am

This sounds like the Banking Lawyer Full Employment Act of 2013-19.

JW December 11, 2013 at 8:32 am

Don’t forget the accountants and compliance experts

dead serious December 11, 2013 at 9:04 am

Compliance and other ‘control’ groups are useless overhead but at least they’re the “good” guys. The lawyers are evil.

JW December 11, 2013 at 9:47 am

Useless and costly overhead that represent a heavier burden for small institutions and funds which explains why many large institutions supported Dodd Frank.

dead serious December 11, 2013 at 2:01 pm

I’m not sure that’s true. Big banks host embedded regulators which means they not only need dedicated senior staff whose jobs are devoted to facing off with these people, but the physical space and infrastructure drains on-site regulators impose. At my last gig a good portion of a floor was reserved for their offices.

Not huge, but not nothing either.

Smaller institutions have no such requirements and can fly under the radar.

oakchair December 12, 2013 at 3:10 pm

Dodd-Frank regulations for the most part only apply to large banks. Furthermore Dodd-Frank increased fees on large banks and lowered them on small banks.
Meaning overall Dodd-frank helps small banks while it reigns in in large banks

Nigel December 11, 2013 at 8:52 am

Banks might be slightly less likely to manipulate markets they are barred from (proprietary) trading in ?

bob December 11, 2013 at 12:21 pm

Probably the best set of policies to come out of the New Deal were those designed to stabilize the financial systems such as FDIC,SEC, etc. We were able to go 80 years without a financial panic, which is a good thing. O ver tiem we chipped away at that regualtion and what returned? Panics.

Volcker has always been someone who is a financial markets conservative- defined in this case as resistant to change- because he thinks the advantages are overstated and not worth the risks. I think those that opppose the VOlcker rule should explain how we can achieve the stability that we had for 80 years until the Panic of 2008.

Gobbly Wobbly December 11, 2013 at 12:39 pm

We were able to go 80 years without a financial panic…

Were we?

oakchair December 12, 2013 at 3:11 pm

it was actually 60 years. In the early 80′s conservative succefully deregulated the saving and loan industry and ten years later that idnustry had a financial crissis and had to be bailed out

Govco December 11, 2013 at 12:38 pm

This was expected. Transactional lawyers wrote those regs and consider regulators their clients; they were not administrators who happen to have with JDs trying to mediate & balance competing interests over a discrete problem. By habit, a transactional lawyer drafts to claim as much benefit for his clients (whether the client has requested overreach or not). Thus, proposed regulation covers every banking activity (not just deposits) and every investment fund (not just PE & Hedge funds), it throws up agencies willy nilly (instead of a single focused one).

At this point in a normal M&A deal, the counterparty’s own transactional attorneys identify and then resist overreach. (Call me a dork, but it’s an entertaining way to make a living.) With Volcker, government lawyers faced no resistance* and their “proposed” overreach becomes admin-law.

I don’t actually know all this, but I’ve seen a similar process in my field.

*The “comment period” for regs doesn’t confer leverage for resistance, but I suppose you hire firms to submit comments with the hope that such firms have employed (or will employ) the recipients of those comments. That’s not my world, but I suspect…

Dallas Weaver, Ph.D. December 11, 2013 at 1:34 pm

Being outside the field, it appears that proprietary derivatives trading desks and banks are playing a zero sum game (less than zero sum when you count transaction costs). Yes, if properly done, this trading can provide hedging functionality equivalent to “insurance” that can be used to justify trading to decrease overall significant risk of failure to the firm. If the firm is “too big to fail”, such risk insurance is of no value or far more limited value that to smaller firms.

Being zero sum type game, the only way to consistently “win” and make the trading desk a profit center is to cheat by using or creating insider information. The definition of a trading desk as a profit center actually says the banks are cheating.

The only way to stop this cheating is for people to go to jail for a long time. In China they have a saying that covers this problem; “you kill the chicken to scare the monkey”. There are a lot of wall street millionaires that need to be jailed and all their assets seized just like they do drug dealers. All the traders and all their income from those making profits from setting phony rates (all the winners) should loose everything.

dead serious December 11, 2013 at 2:03 pm


Why there aren’t heads on pikes and perp walks is beyond me.

Nigel December 11, 2013 at 2:57 pm

Expensive (defence) lawyers, complexity, and the statute of limitations.
A (bipartisan) lack of political completes the explanation.

For a nation that incarcerates around four times as many people (pro rata) as any other developed nation, you’re curiously poor at locking up bad bankers.

Steve Sailer December 11, 2013 at 5:53 pm

The elder Bush Administration locked up a couple of thousand savings and loan executives, plus even the world-historical Mike Milken.

kebko December 11, 2013 at 7:34 pm

Burn the witches! They will deny they are witches, but you can tell a witch by whether they can profit from a trading desk.

Douglas Levene December 12, 2013 at 3:48 am

“it’s hard to imagine what, why and how Volcker is up to” – I don’t want to be too cynical, but one possible explanation for the Volcker Rule is to create incentives for banking organizations to make substantial political contributions to politicians in the years to come – protection money, if you will – to ensure that the rule’s interpretation and enforcement is not too painful.

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