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Friday, October 21, 2016

Wall Street reform will hit a crucial milestone on Tuesday.

Five United States regulatory agencies, including the Federal Reserve, will review and vote on the final draft of the Volcker Rule, a key victory for reformers in the  2010 Dodd-Frank Act. The proposed regulation, which former Federal Reserve chairman Paul Volcker first proposed in 2009, is designed to prevent another financial crisis similar to the one that occurred in 2008.

Specifically, the Volcker Rule would severely limit commercial banks from trading stocks or any other commodities with the firm’s money as opposed to clients’ money. That practice is known as proprietary trading, and can put depositors’ federally insured money at risk or create a conflict of interest between traders’ interests and customers’ interests. Despite the high risks involved with proprietary trading, banks have used the practice to inflate profits.

The nearly 900 pages outlining the Volcker Rule do, however, include exemptions for several bank practices. Banks will still be allowed to trade stocks and bonds for clients — a practice known as “market-making” – and place trades meant to hedge their risks – “risk-mitigating.” Both are difficult to distinguish from actual proprietary trading, inviting attacks from opponents of the law who say the regulation’s wording gives too much leeway to in-house traders.

Still, the megabanks, which could lose billions of dollars in revenues if the Volcker Rule is adopted, are gearing up for legal challenges to prevent implementation.

“For something of this magnitude and this controversial … there will be somebody who will challenge it,” Brian Cartwright, an advisor at Patomak Global Partners and former general counsel at the Securities and Exchange Commission, told CNBC.

In addition to arguing that the proposed regulation is too vague, banks like Goldman Sachs and JPMorgan Chase – which lost over $6 billion in the “London Whale” debacle after engaging in “unsafe and unsound practices” – are expected to challenge the law on the grounds that it never included a cost-benefit analysis.

“Morgan Stanley and Goldman Sachs will go out and hire the best and brightest lawyers, and they will say, ‘How do we do this?’” Bill Singer, a securities lawyer who represents individuals and brokerage firms, told The New York Times.

The cost-benefit analysis may not hold up in court, however; the Volcker Rule was drafted under the Bank Holding Company Act, a federal statute that does not require a cost-benefit section.

In anticipation of the Volcker Rule, banks – even those opposed to the law — have already begun drafting new compliance manuals, training traders according to the rule’s provisions, and reducing proprietary trading. Banks are expected to spend millions of dollars complying with Volcker Rule, if they can’t kill it first.

Proponents of the law say banks can afford to pour resources into changing its practices for a law that is necessary and long overdue.

CLSA banking analyst Mike Mayo – who admits “even I have trouble getting my head around where proprietary trading begins and ends” — has hailed the rule as “ushering in an era of Big Brother Banking,” adding that “Big Brother was asleep on the couch before the financial crisis.”

Dennis Kelleher, part of the Better Markets group that advocates for extremely strict regulations on Wall Street, tells CNBC the law is necessary considering “Wall Street and its lawyers are in the loophole creation-and-exploitation business.”

“For 100 years, banks have made the same complaints about every regulation. They said it during the Depression, and we grew the biggest middle class in the history of the world,” Kelleher said.

Photo: Mathew Knott via Flickr

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Copyright 2013 The National Memo
  • docb

    Please, they have been fighting this tooth and nail with millions of dirty dollars since it was written. The chickens in Congress have caved except B. Sanders and E Warren…

  • Lovefacts

    On the upside, if they’re spending hundreds of millions of dollars fighting the Volker Rule, they may not have sufficient monies to fund campaigns. Okay, I’ll admit it, that’s wishful thinking. No way, they won’t find a way to buy their candidates.

    • ayungclas

      The banks will be spending our savings.

      • Lovefacts

        My understanding is that banks can only invest client monies when said client has an investment account with them and those investments must be approved by the client. If I’m wrong, that loophole must be remedied immediately. But to do, and prevent a gutting of the original Dodd Frank Bill we need a majority of Democrats in the House and 60 in the Senate.

        • idamag

          That was before Glass-Steagal was repealed. The deregulation gave banks free reign to do whatever they want.

  • anamericancynic

    I guess the funny thing is that America is yet to learn that big business is not looking out for them, does not create jobs, and is selling us out for profit. But on the bright side, we have the low prices of Walmart and the crap food of McDonalds, we should all be so proud!

    • highpckts

      And what is so disheartening is we have NO say in any of it!

      • Mark Forsyth

        That may be true the way the law is written but watch those sons of bitches squeal when enough pissed off people start taking names and kicking ass.They won’t be able to find enough windows to jump out of

        • CPAinNewYork

          Brave words, Mr. Forsyth. I’m all for kicking ass and taking names, but just how do you propose going about it? Please be specific.

          • Mark Forsyth

            You mistake me.I’m not proposing anything.What I “am” doing is trying to enlighten some folks to the historical fact that when you put enough people in duress,they very often take matters into their own hands.Our very own Abe Lincoln stated that we the people have a right and a responsibility to overthrow and replace the government should it become overburdensome and unresponsive to the needs of the people.
            I would say that the government along with certain government connected corporate entities are on thin ice these days,wouldn’t you? How much crap do “you” think the people will tolerate.I’m inclined to think that when the system starts killing people indiscriminately that the shit will hit the fan soon after.But please don’t think that I desire that scenario no matter how much I want to prosecute the guilty ones.

      • plc97477

        Sure we do. We don’t shop at walmart, walmart needs to find ways to make us want to shop there. We don’t eat mcdonalds, same there. Our say is with our money.

  • howa4x

    There is always enough wiggle room in federal regulations and the mega banks have experts in finding the worm holes. Democrats are no angels in defending the banks. Think Sen. Charles Schumer D NY. Also a lot of them help fund the Clinton global initiative so it will be interesting to see what Big Dog does.

  • CPAinNewYork

    Not surprising to learn that the banking crooks are fighting the imposition of the Volcker Rule. Those crooks don’t want any supervision.

    They should be in prison.

    • Mark Forsyth

      From your lips to God’s ear my friend.

  • Thomas Aquinas

    Adam Smith’s claim that collectivism unleashes evil is well supported by the history of dictators who have claimed that society’s well-being depends upon its subjugation.