The "Volcker Rule" II

http://www.nytimes.com/2010/07/11/business/11volcker.html?_r=1&emc=eta1

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"Capitalism without bankruptcy is like Christianity without Hell." (Frank Borman)

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If one were to draw up a plan for totally incompetent financial regulation for a period of oh, let's say 10 years, then the U.S. financial regulatory system would be your model. Now, a disclaimer here: this subject is so incredibly "boring" that you should move on if you have other interests. The trouble is that we need to address it because we almost had a "Depression" out there in the world.

So many people were asleep at the switch and so many people were looking to get rich quick, it is just so hard to keep track of all of the players. Ah heck, we'll mention two: Alan Greenspan who gave us the already infamous statement, "Financial markets are self-regulatory," while he was basking in the glow of being called the greatest chairman in Federal Reserve history, a title which should probably go to the person whose name titles this post. And, secondly Lawrence (don't call me "Larry") Summers who helped Alan Greenspan lead the charge to set aside Glass-Steagall in 1999 (so that the monstrosity called "Citigroup" could be created, and so that banks could make risky investments just like the other financial institutions who knew what they were doing), as Secretary of the Treasury, and who now heads the President's Council on the Economy (or whatever it's called). For Summers, there was, we believe, a short stint in between where he served as president of Harvard, managing incredibly quickly to alienate all of the women on the faculty (but, that's another story).

We are following up here on Paul Volcker's separate effort to enhance the quality of pending financial reform legislation. The Times (7/10 attached) quotes him as endorsing the proposed legislation, but "unenthusiastically." He gives it a "B."

Volcker's problem is that he still feels that the legislation doesn't go far enough in curbing potentially problematic bank activities like investing in hedge funds.

Despite his recent efforts to ensure that financial legislation might correct what he regards as some of the mistakes of the "deregulatory years," he's concerned that the new legislation still gives banks too much room to repeat the behavior that got the U.S. in trouble in the first place.

We had runaway inflation early in Volcker's tenure as Fed chairman (1979 - 1987). He crushed it and is fondly remembered by many for the tough decisions he made then.

His "Volcker Rule" is still part of the new legislation but he feels that it has been watered down.

So, while the legislation is scheduled to be voted on in the Senate this week, Volcker is looking toward how aggressively the "regulators" implement the law as the key to whether it will work. The Volcker Rule itself went from "what is best" to "what could be passed." For aficionados of finance, the Volcker Rule, in effect, attempted to restore Glass-Steagall.

Neither Volcker, nor Alan Greenspan who followed him, anticipated the extent to which "credit-default swaps, derivatives and securitization" would be used after Glass-Steagall.

The legislation which is about to be passed contains an "... annoying and potentially dangerous loophole ..." according to Volcker: instead of forbidding banks to make investments in hedge funds and private equity funds, the amendment allows them to invest up to 3% of their capital in such funds, so long as the fund is "walled off" from the bank in a separate subsidiary (where have we heard that before?).

Really? And this is supposed to work?

Our thought is that the lobbying on the part of the big banks worked. And, of course, that lobbying was paid for by taxpayers (government bailout money), or, was the lobbying money "walled off" from taxpayer money? It's all so confusing.