David Dayen: The financial regulation life cycle: write, water down, chip away, obliterate

By David Dayen, August 2, 2017

The Volcker rule was a sensible principle on the day Paul Volcker announced it in January 2010, in the first Obama administration response to Scott Brown’s Senate victory. Financial institutions shouldn’t be able to take deposits and use the money to gamble in the capital markets. Simple, right? But that one-sentence rule got pinched and hedged when made into legislation, shaped into an incomprehensible mess by the regulators, delayed from enforcement and compliance for years and years, and now is poised to be further pushed into irrelevancy.

Under new management in the Trump administration, the same regulators that wrote the Volcker rule now plan to rewrite it, presumably on terms favorable to the banks. It’ll take a year or more, but RIP Volcker (not him, the rule). By complete coincidence, bank stocks are at an all-time high today.

Regulators can’t completely depart from the legislative text but they have significant leeway. Treasury Secretary Mnuchin already outlined some of these changes earlier this year, including allowing proprietary trading up to $1 billion. We will subsequently see the flowering of subsidiaries at the major banks to duplicate and maximize that $1 billion number. Treasury’s call for “increased flexibility” for exempting market-making or hedging from the rule would just lead to banks calling every trade market-making or a hedge. We’ve already seen banks invent “porfolio hedging,” claiming that virtually any trade offsets the rest of the balance sheet. And the proposed increase in the “seeding provision” would allow banks to make excluded investments (in hedge funds, for example) for up to three years.

The Office of the Comptroller of the Currency (still led by a part-time temp who in his day job is a bank lawyer) has already kicked off this process by soliciting public feedback. None of this requires Congressional input, which is the only way most things have gotten done under Donald Trump. The result will not be so different from the current complex, unenforced rule we have today. But it should give pause to technocratic-based solutions that can be endlessly damaged behind closed doors. If and when lawmakers turn again to breaking down the power of the financial industry, they’d better be prepared to draw some bright lines.

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