About that "toothless" Dodd-Frank reform...

Dodd-Frank is widely written off as meek, weak and watered down by relentless bank lobbying.  Perhaps it is in many respects. But the long-unfinalized and tortuously complex Volcker Rule, largely eliminating the banks' proprietary trading and in-house hedge and private equity funds, has already had significant effect, as the WSJ's Scott Patterson recounts:

Regulators aren't expected to start strictly enforcing the Volcker rule until 2015, giving banks some breathing room. Because the rule was widely anticipated, most banks already have done away with operations focused on proprietary trading, or making bets with their own money.

For example, Goldman shut down in 2010 its Principal Strategies in-house trading unit, partly as a response to the looming Volcker rule. Last month, Goldman Chairman and Chief Executive Lloyd C. Blankfein outlined other steps being taken by the New York company to comply with the Volcker rule, including "winding down our hedge-fund investments."

Moreover, the relative hawks in the contentious five-agency rule-writing process, most notably outgoing CFTC Chair Gary Gensler, seem to have in large part prevailed on key issues in the rule's pending finalization next week:

Proprietary trading and banker's pay updates

After the post-mortems to the passage of the Dodd-Frank financial reform bill, I was under the impression that the Volcker Rule, which purports to ban deposit-taking institutions from engaging in proprietary trading, had been weakened to the point where its prohibition was merely notional for the foreseeable future. For one thing, Scott Brown managed to get the ban on FDIC-insured banks investing in hedge and PE funds scratched at the last minute. I thought that implementation of the surviving provisions had been placed on a long slow track. And indeed, regulations regarding how proprietary trading will be defined and how the ban will be enforced are not due for nine more months and remain very much a matter of contention.

So I was surprised by this in yesterday's WSJ:

Morgan Stanley reached an agreement with proprietary-trading chief Peter Muller that will allow his team of traders to form a new firm at the end of 2012, people familiar with the matter said.

The widely anticipated deal is the latest exit by high-profile traders from traditional Wall Street firms because of the Volcker rule, approved as part of last year's Dodd-Frank financial-overhaul law...[snip]

The Senate gets into the swing of bankwhacking

Some months ago, as health care reform languished and the Senate ground nearly to a halt, one read frequent laments that the moment for sweeping financial reform was being wasted -- that by the time the Senate got around to full consideration, memories would have faded, rage against the banks cooled, and lobbyists' hooks sunk ever deeper. 

Reasonable worries, perhaps. But those who despaired of strong reform did not reckon on HCR passage changing the dynamic in Congress; or on the pressure that would be generated by bringing the bill to the floor just as election season heated up; or on the fresh spur to rage afforded by an SEC suit (and criminal investigation) against the nation's most lucrative financial institution.

Just nine days ago, Jonathan Chait was marvelling at the strength of the Dodd ill as it came to the floor. Now, the WSJ reports, a tide of amendments is bidding to restrict financial institutions' activity far more radically:

Sens. Ted Kaufman (D., Del.) and Sherrod Brown (D., Ohio) plan an amendment that would prohibit any bank from ever holding more than 10% of the country's deposits and put strict caps on the debt banks issue.

Sens. Maria Cantwell (D., Wash.) and John McCain (R., Ariz.) have worked on an amendment that would force commercial banks to separate from investment banks—revisiting the Glass-Steagall Act of the 1930s.

Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.) plan a provision to forbid banks with federally insured deposits from certain trading activities.

Frank Rich wrote his column too early this week

Credit Frank Rich with warning Obama early and often to get "in front of the anger roiling a country where high unemployment remains unchecked and spiraling foreclosures are demolishing the bedrock American dream of home ownership," as he puts it in today's column. He's been sounding this note since last spring. The event has proved him right. He may be our most astute reader of media memes, popular mood, and political posturing.

Today he's at it again. But he seems to have written his column before Obama proposed his "Volcker rule" banning proprietary trading and internal hedge funds - and then gone back and just inserted a brief allusion to it after the event, without at least partially recasting the column as the Thursday event required.


Here's Rich's brief acknowledgement of the turn to Volcker:

Obama needs more independent economists like Paul Volcker, who was hastily retrieved from exile last week after the Massachusetts massacre prompted the White House to tardily embrace his strictures on big banks.

Paging John McCain

Quick question, though I'll confess to not yet looking at the fallout from the Supreme Court strike-down of McCain-Feingold in any depth: where does McCain stand on McCain-Feingold II?  Not to mention on Obama's proposed "Volcker rule," a lighter version of McCain's proposed Glass-Steagall II.

Historical accident would seem to have put McCain on the Dems' side of the ledger on two key fronts just as the Democrats have lost their 60-vote supermajority.

Will the worm in John McCain's soul turn once more and turn him left? I wouldn't bet on it. But still.

UPDATE 1/23: The WSJ has this reaction to Obama's bank reform proposals from McCain:

But in a political environment decidedly hostile to big banks, Democrats might need only a few Republican votes to enact a variant of what Mr. Obama called "the Volcker rule." Sen. John McCain, the Arizona Republican, said the White House appears to be moving closer to a proposal he is co-sponsoring that would reinstate restrictions on banks that were repealed in the late 1990s. "It seems to me that a number of the proposals [Mr. Obama] has move in that direction," Sen. McCain said, "but I haven't had a chance to examine the details."

Most recent post: Frank Rich wrote his column too early this week

Tory Hallelujah

Bulletin to those claiming that Obama's proposed ban on proprietary trading etc. for deposit-taking banks will drive major banking operations overseas (FT):

Tories ready to follow Obama’s lead

The UK opposition Conservative party is likely to follow the lead of Barack Obama , US president, and introduce similar trading curbs for banks based in the City if elected, George Osborne, the shadow chancellor, said Thursday night.

The Tories – widely expected to win a general election which is due within four months – fired a warning shot across the bows of financial institutions including Barclays, Deutsche Bank, Credit Suisse and UBS,saying the Obama crackdown on proprietary trading was “definitely something we think needs to be done”.

When the Brits slapped their giant tax on bank bonuuses, they were covered by similar action fom the French and Obama's proposed tax on bank liabilities.  If the Volcker rule gets traction, other major banking centers will probably follow suit.

Quote of the Day

“Paul Volcker, a top economist in the Obama Administration and former Federal Reserve Chairman, wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008.  And the administration is saying no, it will not separate commercial banking from investment operations.  Mr. Volcker argues that regulation by itself will not work.  Sooner or later, the giants, in pursuit of profits, will get into trouble.  The Administration should accept this and shield commercial banking from Wall Street’s wild ways..."

John McCain, Dec. 17, 2009
On the Banking Integrity Act of 2009

Quote of the Day II

When banks benefit from the safety net that taxpayers provide, which includes lower-cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit. And that is especially true when this kind of trading often puts banks in direct conflict with their customers’ interests.

The fact is, these kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong.

We simply cannot accept a system in which hedge funds or private- equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if a bank wins, but taxpayers foot the bill if a bank loses.

Barack Obama, Jan. 21, 2010
On Additional Reforms to the Financial System (e.g., "The Volcker rule")

McCain's bill calls for a complete ban on investment banking activities by deposit-taking banks; Obama proposes simply to ban proprietary trading and internal hedge funds. So what excuse will McCain find to oppose the milder separation of bank functions?

Bad call of the month

WSJ, 1/15/2010

Volcker Voices his Views in a Vacum

Paul Volcker is talking. But is anyone listening? [snip]

The two speeches highlighted Mr. Volcker's predicament. Having been viewed as a crucial supporter of Mr. Obama during his presidential run, he appears to have diminishing influence in the White House. And while revered by Wall Street critics on the left and right, his most deeply held views are having limited influence among policy makers.

"It's clear that the ideas Paul Volcker is pushing now are not shared by the administration," said Douglas Elliott, an economic studies fellow at the Brookings Institution, a public-policy organization. Given the difficulty of hiving off bank-lending units from their trading operations, adds Mr. Elliott, "I agree with the administration on that one."

Obama, 1/21:

... I’m proposing a simple and common- sense reform, which we’re calling the Volcker rule, after this tall guy behind me. Banks will no longer be allowed to own, invest or sponsor hedge funds, private-equity funds or proprietary trading operations for their own profit, unrelated to serving their customers.

Actually, the Journal had a story  a few weeks ago which, while noting that Volcker's main ideas had not become Administration policy, also reported that Volcker was methodically, patiently building support for them. But WSJ online l has so eviscerated its search engine in the Murdoch era (and ditto for Factiva as offered through the Journal subscription) that I can't find it.