In a major win for big banks and Wall Street U.S. Regulators Gut the ‘Volcker Rule’.
U.S. banking regulators on Tuesday approved changes easing a rule introduced after the 2007-2009 financial crisis that bans banks from trading on their own account, giving Wall Street one of its biggest wins under the Trump administration. The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) approved the revamped version of the so-called “Volcker Rule,” which aims to ban lenders that accept U.S. taxpayer-insured deposits from engaging in proprietary trading.
The changes, first proposed in May 2018, followed years of lobbying by banks, including Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N) and Morgan Stanley (MS.N), which have long complained the rule is too vague and complex.
FDIC commissioner Martin Gruenberg, a Democrat who backed the Volcker rewrite proposed in May 2018, voted against the final rule Tuesday, saying it would “effectively undo” the rule’s protections. The other three FDIC board members, all Republicans, voted in favor.
“Trump regulators continue to open a Pandora’s box of risky trading and speculation at the expense of American taxpayers,” Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, said in a statement.
Analysts say the final rule, which is significantly different from the proposed 2018 version, could also be vulnerable to legal challenges. The final rule scraps that proposal for large Wall Street firms, instead simplifying the original test and only applying it to much smaller banks. At the same time, the rewrite simplifies a separate part of the rule which makes it easier for banks to invest in hedge funds or private equity funds.
Details Scant
The details presented are scant and I don’t doubt that regulation may have been overdone.
In general, I am against regulation except where the purpose is to prevent fraud and misuse of client funds.
I am also against FDIC but I am in favor of 100% reserves on customer deposits which would eliminate leverage totally.
So go ahead and scrap the rules but replace them with an even simpler rule demanding 100% reserves and no leverage.
Just in the Nick of Time
With a recession at hand and stocks overvalued beyond belief, banks can once again trade against their customers and invest in hedge funds.
Wait a second, only big banks.
It was a complete victory for the big banks, against customers.
Mike “Mish” Shedlock
LOL. Trump supporters crow about deregulation and then whine like little bitches when someone mentions the Financial Crisis bailouts and the trillions of dollars gifted to the banks. I suppose you guys are simply too stupid to understand that they go together. Or perhaps so naive that you really believe that Wall Street will self-regulate and that banks won’t get bailed out again when it all falls apart.
You’re so cute when you’re stupid.
I have only recently become interested in economics and don’t know as much as you Mish, but if you had to have 100% reserves would there be enough abilities to give loans to people for cars and homes? Would the banks make enough to offer interest on top of paying employees?
“The details presented are scant and I don’t doubt that regulation may have been overdone.”
Regulation was overdone, but Greenspan took lending standards to ZERO and the SEC gave leverage waivers to the BIG INVESTMENT BANKS after which they went to town and recklessly leveraged up to as much as 30 to 1, at which a 3% loss bankrupts. They all naturally crashed as a result- which is why the SEC leverage limit was set at 12 to 1 in the first place. Overdone begets overdone.
“It was a complete victory for the big banks, against customers.”
Customers can create their own big victory and terminate their accounts with big banks.
Does anyone remember the last time these words were uttered ?
“So go ahead and scrap the rules but replace them with an even simpler rule demanding 100% reserves and no leverage.”
That negates the very purpose of banks. You might as well nationalize them and have the government initiate most loans.
Another win for big (not small) business. Big banks can now take more risk and thus will attract investments they otherwise wouldn’t have. I say let us have no regulations . The over/under on a flash crash would be about 2 business days in that scenario.
Any and all regulations will inevitably be in favor of the haves, to the detriment of the have nots.
Things simply cannot, even theoretically, be any other way. At least until any given random homeless guy living under a bridge, is as likely to be asked for his input on economic matters, as Warren Buffet is.
This is less about the homeless guy under the bridge and more about systemic risk. We are one step closer to MMT in 2020 or 2021 after today.
Contingent Liabilities.
One of the few things Alan Greenspan uttered that you knew to be true. Said when looking at USG debt / entitlement mountain not the entire picture of USG balance sheet. USG needs to prepare to assume balance sheets of very large entities (read: banks) that if failed could wreck markets / economy (and why he was pissed at GM bailout. Wanted status reserved for Wall Street). If banks have this implicit back stop there should be an extra layer of supervision / regulation.
All this could be avoided if the Kaufman amendment had passed on Frank – Dodd. Amendment would have broken up banks. No bank’s balance sheet could be greater than 2% of GDP. When this failed I knew Frank – Dodd was toilet paper and TBTF cemented.
Thanks. Your posts always get to the heart of the matter succinctly.
“Just in the Nick of Time”
…
Indeed. Now Kudlow can breathe a sigh of relief.
Only a matter of time before he is bleating: Taxpayer must give a blank check to Wall Street, or civilization as we know it ENDS.
Reinstate the Glass Steagall Banking Act (repealed by Bill Clinton).
“The details presented are scant”
Ok – what are we complaining about?
Hello RedBanana, right you are about Clinton.
For bonus points, do you know which team Gramm, Leach, and Bliley represented? They were the three who proposed that bill.
Didn’t the treasury secretary at the time, Rubin do the urging for the repeal. Didn’t he also go to work for Citibank the biggest beneficary of the repeal and make over $300 million. Didn’t this asshole then during the GFC admit that it was a bad idea. We do have the best govt money can buy.
Not sure about Rubin’s role but I would imagine a Goldmanite like him was entirely for repeal, plus I’m sure he eagerly encouraged Clinton to sign.
The selling out of the US public was an obviously bipartisan affair, something MOST people here understand.
Only one republican senator voted against the bill- Shelby.
Who knew armageddon would come with circus music accompaniment?
…and only the best clowns.
It’s staggering to see how humans are seemingly incapable of learning from past experiences and making permanent and rational adjustments to prior failed policies.
I don’t know, but maybe we should just turn the whole shabang over to AI computer programs, because the “intelligence” part somehow evades human comprehension.
More realistically; just stop dragging our feet and turn it over to the jihadis already.
“FDIC insurance is only needed when irresponsible banks lend irresponsibly.”
Bingo. It contributed to excessive risk taking but many other factors involved as well. It took time
And what constitutes an irresponsible bank? Usually businesses that play fast and loose with the books are rewarded at the stock market. So soon everyone has to play the same game or risk having some hedge fund manager dump their stock.
They serve man.
The Dow Drops
By: bob | 2019/08/14
This is what happens when you put an amateur behind the wheel.
Government is a professional job, and Hillary Clinton was demonized by the right for thirty years to the point where she could not win the election.
Oh, don’t tell me how she won the popular vote, don’t even tell me about Russian intervention, the truth is she lost. Democrats play by the rules, Republicans know that rules should be broken. And for all you on the straight and narrow, ever notice that the tech titans, almost all Democrats, break the rules on a consistent basis? Wasn’t that the mantra of Facebook, “move fast and break things”? And today’s paper says that Facebook was transcribing audio, it hired outside people to do it…didn’t anybody know this was wrong? That’s like saying if I hire someone else to kill my wife, it’s not my fault. The techies play offense, and then apologize when they get caught crossing the line.
The Republicans define the game.
Forget the Trump base COMPLETELY!
…..
Exactly who makes up your ‘professional’ ‘government’ ? Most politicians are self-serving self-aggrandizing people who aren’t all that good at real work. As for government employees, most are lazy liberals who receive a substantially higher salary than they would receive in the private sector. The worst government employees are found in public schools and universities. They are packed with liberals trained to suck on the public teat.
“Government is a professional job, and Hillary Clinton was demonized by the right for thirty years to the point where she could not win the election.”
Of coarse, that is a fiction. It was Hillary, not the right, which had reckless disregard for the operation of her private server.
It was Hillary herself, that cost her the election.
Trump scores again! It will take decades to fix all the damage he has done once we get rid of him.
Without leverage loans would grind to a halt. Giving out a loan with good collateral is generally a safe bet and I would hate to see the economic ice age that would result if no leverage by the banks was allowed
I agree. Nothing wrong with credit which is a bank-issued IOU that is NOT guaranteed beyond the actual future means of the bank. But such credit needs to held as an instrument distinct from non-credit money. Paying with gold coins is fundamentally different from paying with bank credits. Today all forms of money are treated as equivalent: it’s IOU-turtles all the way down.
+1
There’s nothing wrong with fractionally reserving, as long as that which you thus lend out, is very obviously backed by nothing more than the full faith and credit of the lending institution itself.
Inevitable Armageddon only results, the instant third party resources are commanded to “save” either lenders or borrowers. Make sure this simply cannot happen; by getting rid of fiat money and making sure any individual gold holder possess the firepower to rebuff any attempt at confiscation, and banks and spendthrifts can lend and borrow to their hearts content, just as God and evolution intended free people to be able to.
The initial reason the Federal Reserve was established was to provide liquidity to banks in the event of a liquidity crisis. This should be their only function, the other mandates are political bullshit to benefit useless politicians. Anyway this function makes sense. The fed takes good collateral from banks that need cash in the event of a run or liquidity event and keeps the wheels greased. I fail to see any problem with this. The govt bailouts are not the same thing and should have never happened.
Bank IOUs used to be traded this way, but there were constant runs on banks at the slightest sign of trouble. So, they banded together and made all their IOUs the same. Problem solved. Everything is a reaction function.
I think the complaint isn’t that loaning out interest bearing accounts is all that bad, just that we’re all living with sweep checking accounts that get converted to an interest account even though they’re supposed to be demand accounts. That’s considered OK though because of the FDIC. Because they’re still on the books as demand accounts they don’t have to offer interest rates that reflect the true risk. And they get free access to demand accounts, so they can also suppress interest rates on money market, CD and other interest bearing accounts.
I also support the 100% reserve requirement.
Will it happen? Never. Too much short term pain is required which will come out at the ballot box.
However, my wife’s grandfather lost 300k from bank failures during the 2007-08 crisis. Yes, he had too much in one account, but in a world that doesn’t have fractional reserve lending, it wouldn’t matter. FDIC insurance is only needed when irresponsible banks lend irresponsibly.