The Volcker Rule That Isn’t: The Velvet Rope Approach to Criminal Behavior

By Pam Martens: December 11, 2013

CFTC Commissioner, Bart Chilton, Says the Volcker Rule Puts a Velvet Rope Across the Doorway of the High Roller's Room. That's Exactly the Problem.

If you were a fan of the Dodd-Frank financial reform legislation that did absolutely nothing to rein in Wall Street’s ability to plunder the life savings of the little guy, you will absolutely love the Volcker Rule that was approved, but not instituted, yesterday by five regulators. Just like Dodd-Frank, it’s voluminous, running over 800 pages, postpones the actual enactment into the distant future, and is chock full of loopholes and slippery passages.

The so-called Volcker Rule is Section 619 of the Dodd-Frank legislation. Its original intent was to quickly stop banks holding insured deposits from speculative trading for their own account (proprietary trading). It was also meant to prevent banks from owning hedge funds and private equity funds which could potentially blow up an insured depository institution and require the kind of taxpayer bailouts that occurred in 2008.

We can now emphatically tell you that both the Dodd-Frank legislation and its Volcker Rule are nothing more than full employment programs for Wall Street’s legions of lobbyists and lawyers. They have been charitably handed millions of billable hours that will continue for endless years.

According to the Federal Register, it has received 328 final or proposed rules related to Dodd-Frank in the past year. Dodd-Frank was signed into law on July 21, 2010. It’s now December 11, 2013. The Volcker Rule that was “approved” yesterday is not set to take full effect until July 21, 2015. That’s five years after the original Dodd-Frank legislation was passed and almost seven years after Wall Street crashed the financial system and the U.S. economy. But the authors of the Volcker Rule have one more caveat about when it might actually take full effect. The rule says: “The Board will continue to monitor developments to determine whether additional extensions of the conformance period are in the public interest, consistent with the statute.” This is the same as waving a flag and saying, “lobbyists, rev up your engines…”

In a fashion similar to the parent of a serially truant child who needs a handwritten note from his enabling parent to explain his absence from school and homework, the Federal Reserve Board of Governors released this statement yesterday explaining why the Volcker Rule won’t take effect until 2015, and maybe not even then:

“In order for a banking entity to conform its activities to the prohibitions and restrictions in section 619 and the final rules, a banking entity must first evaluate the extent to which it and all of its affiliates are engaged in covered activities as defined in the final implementing rule and then develop and implement a conformance plan to come into compliance by the end of the conformance period. Banking entities must also terminate prohibited activities and divest impermissible investments in order to be in compliance by the end of the conformance period which in some cases will require the divestiture or restructuring of illiquid covered funds…”

This statement is complete buffoonery. Wall Street firms have known what Section 619 of the law required them to do since July 21, 2010. Instead of divesting themselves of the improper activities, they’ve spent their time and shareholders’ money fighting the rules.

The largest Wall Street bank by assets, JPMorgan Chase, spent its time flagrantly violating the intent of the Volcker Rule, secretly trading with insured deposits in London in such illiquid and exotic derivatives that it couldn’t exit the positions and ended up losing at least $6.2 billion of depositor funds. That became known infamously as the London Whale scandal.

On March 15 of this year, Senator Carl Levin told the Senate’s Permanent Subcommittee on Investigations which comprehensively investigated the London Whale saga, that JPMorgan “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.” Does that sound like a repentant Wall Street ready to abide by the rules set down by its regulators?

The only thing more shameful this morning than the language of Section 619 is the fawning mainstream media headlines. USA Today promises the public that the “Volcker Rule Reins in Banks’ Riskiest Trading”; the Los Angeles Times salutes the illusion with “Regulators OK Volcker Rule, Curbing Big Banks’ High Risk Trades” adding the words “stiffer” and “stricter” in this misleading paragraph: “The measure highlights a new era of stiffer oversight as emboldened regulators flex their muscles. The stricter-than-expected rule comes amid a barrage of costly government investigations into the financial industry…” The Washington Post optimistically suggests in its headline that “Volcker Rule Should Bring Some Order to Financial Reform.”

As a few courageous souls in Congress, led by Senator Elizabeth Warren, have realized, the only thing that will bring safety and soundness to the U.S. banking system and orderly financial markets is the restoration of the Glass-Steagall Act. That legislation served this nation well in keeping insured banks separated from the casinos on Wall Street from the time of its passage in 1933 to its repeal in 1999. It took just nine years from that repeal for Wall Street to deliver the greatest financial collapse since the Great Depression – an era brought on by the lack of a Glass-Steagall Act and the reason for its passage in 1933.

Bart Chilton, a Commissioner of the Commodity Futures Trading Commission, one of the five regulators who approved the new rule yesterday, released this statement: “We should never again be put in a circumstance where too big to fail high rollers play games of chance with our nation. This rule takes a heavy velvet rope with brass ends across the doorway and closes the high roller’s room.”

That’s an incredibly Freudian slip and apt description of what these regulators did: they used a velvet glove and velvet rope approach to a problem that is screaming out for serious regulation. The high roller’s room wasn’t destroyed with a wrecking ball; all that is separating the country from the next great financial crash is a meaningless little velvet rope.


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