As Bloomberg puts it, what with the diminished oversight on derivatives in the budget bill and this new announcement by the Federal Reserve re a two-year delay in the Volcker rule, this holiday season is shaping up to be the best one yet for the financial sector. Recall that the Volcker rule is the part of Dodd-Frank that prevents federally insured banks from trading their own books in securities that put taxpayers and the broader financial system at risk.
Banks added to their wins in Washington this month by getting a reprieve from the Volcker Rule that will let them hold onto billions of dollars in private-equity and hedge-fund investments for at least two more years.
The Federal Reserve granted the delay yesterday after banks said selling the stakes quickly might force them to accept discount prices. Goldman Sachs Group Inc. has $11.4 billion in private-equity funds, hedge funds and similar investments, while Morgan Stanley has $5 billion, securities filings show.
Um…Dodd-Frank passed in 2010. Yes, ironing out the details of rule took too long, but the intention of the law–to block proprietary trades of the types noted above–was clear from the start. Which brings us to the quote of the day, if not the month, by none other than Volcker himself:
It is striking, that the world’s leading investment bankers, noted for their cleverness and agility in advising clients on how to restructure companies and even industries however complicated, apparently can’t manage the orderly reorganization of their own activities in more than five years. Or, do I understand that lobbying is eternal, and by 2017 or beyond, the expectation can be fostered that the law itself can be changed?
I’ll grant you at least two things here. First, we won’t know how well most aspects of Dodd-Frank will work until we try them. “Pushing out” derivatives–the now defunct rule to move such trades out from under the government backstop–or the Volcker rule are complicated changes to a complex system. But we’ll never learn anything if we don’t try them and it’s my increasing sense that we’re predictably forgetting lessons we should have learned in the last crash.
Second, of course the banks will say these measures are burdensome and costly. They are! That’s the point. It’s surely a lot easier and more desirable to keep reaping profits by maintaining your old business model. But these costs must be weighed against the benefits of not having another bubble and bust. So I’m with Mr. Volcker here: stop coddling the financial sector and implement the damn bill.
(H/t: Anthony M.)