With great fanfare, President Obama personally unveiled the Volcker Rule this week. It’s not often that a President will take center stage for the passage of a departmental regulation but the Volcker Rule is a centerpiece to his Administration’s efforts at financial reform.
In the President’s own words, “The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets.” This isn’t a bad idea, because whereas you and I understand speculative betting to be dropping a hundred dollars of our own money at a casino, Wall Street banking firms have understood this a little differently. Since 2000, firms had been dropping billions of dollars in risky market ventures, and some banks lost big. JPMorgan Chase, for example, lost $6.2 billion… of other people’s money. Much of this lost money came from deposits that were federally insured.
With antics like these from Wall Street, it’s clear that reform was badly needed. But will the Volcker Rule achieve its desired end of stopping risky speculation by big banks? Surprisingly, many familiar with Wall Street are saying the rule won’t work because it has too many holes in it. Former Democratic U.S. Senator Ted Kaufman wrote in Forbes this week that there are so many exceptions and instances of unclear language in the Volcker Rule that Wall Street’s corporate lawyers will have no problems getting around the rule. Kaufman also cites a Duke University study showing that between July 2010 and July 2011, 94% of the meetings held to develop the rule by federal regulatory agencies were held with the supporters of the financial institutions that were to be regulated. At the same time, only 3% of regulation development meetings were held with public interest and labor groups. This may be why Bloomberg’s December 11th article on the rule’s passage was entitled, “Wall Street Exhales as Volcker Rule Seen Sparing Market-Making.” There may actually be little in the Volcker Rule that Wall Street banking institutions need to worry about.
Time will tell whether or not the Volcker Rule will stop big banks from gambling with their depositors’ money, especially given the influence Wall Street lobbyists and lawyers had on the way it was shaped. But at the very least, the ball to provide a much needed consumer protection is now rolling. In any event, as both Democrats and Republicans receive huge amounts of money from those on Wall Street whom they purport to regulate, the responsibility to make certain the spirit of the Volcker Rule is enforced ultimately rests on our shoulders. We must remain watchful.
Written By Matt Haarington
Directo of Policy Anaysis
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