This may be the best rationale I’ve seen the MSM use when mentioning the Volcker rule:

“The Senate is considering writing into law what Mr. Obama calls “the Volcker rule,” which would effectively bar banks from the risky and often lucrative practice of trading for their own accounts. The Volcker rule is aimed at undoing a side-effect of the bailouts of 2008 and 2009: An assumption that government will always rescue big financial institutions, and thus make it easier for them to borrow heavily to make risky bets.”

I keep hearing people complain that the Volcker rule would not have prevented the crisis. The Volcker Rule is aimed at the side effects of the rescue, not prevention. Indeed, in the post crisis, post-bailout era, we must strive not only to prevent the next set of taxpayer funded bailouts — but to minimize the negative repercussions of the last rescue.

Typical of ignoring the impact of the rescue is the fin services mega lobbyist, the Financial Services Forum.  Consider what their spokesbitch, Rob Nichols, recently bleated:

“Trading—proprietary or otherwise—didn’t lead to the recent crisis. Let’s focus on correcting the major deficiencies in our current supervisory framework first.”

That is an example of a false dichotomy — there is nothing that prevents a society from a) attacking the cause of problem and b) cleaning up the side effects of the prior rescue.

Of course, that is not how bloodsucking lobbyists and preservers of the status quo see it — they simply don’t want anything to change. Financial Services Forums’ Nichols wants the Fed to be in charge of regulating the largest banks. Based on 1) his approval of the Fed’s performance this past crisis; and 2) His prior job as Assistant Secretary of the Treasury under President George W. Bush — he is obviously a huge fan of incompetence.

Nichols continues to defend Too Big to Fail, supports taxpayer funded speculation, and wants to insure the mega banks are free from regulation.

In his stint in the last administration, Nichols helped contribute to the crisis; As a lobbyist, he is hellbent on making sure future administrations have another crisis.

Heckuva job, Nichols.

>

Source:
New Life for ‘the Volcker Rule’
BOB DAVIS
May 1, 2010
http://online.wsj.com/article/SB10001424052748704093204575215920817484134.html

Category: Bailouts, Regulation, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “Volcker Rule Aims at Moral Hazard”

  1. R. Cain says:

    ‘The Volcker Rule Minus Teeth’
    good analysis by sharp cookie Nomi Prins:
    http://www.prospect.org/cs/articles?article=shadow_banking

  2. cognos says:

    But WHY dont we actually write the rules that would’ve prevented the crisis?

    1 – No prepayment penalties on residential mortgages (this stops all “teaser rate” loans and the con-man sales jobs)

    2 – Require 20% downpayment on all residential mortages in the future including pre-construction purchases. (bam, entire problem solved).

    3 – Remove or reduce silly “tax deductable interest” on residential mortgage up to $1.1M (WTF! Even on 2nd homes!). This is really a massively regressive govt induced, almost criminal, incentive to lever housing and the benefits accrue mainly to the top 3% of US citizens.

    4 – Provide a regulation mechanism for increasing the downpayment required in boom times. This is how China is handling its housing bubble. Ideally, in 2006… the regulators would’ve started requiring 30% down on all owner-occupied homes and 40% or 50% on all second homes. (bam, again problem solved).

    5 -Write up a standard 1-page, “plain language” disclosure form required for ALL residential mortgages. And some simple standardized parameters so that lenders ONLY COMPETE on rates, fees, and basic terms… not complexity and obsfucation.

    This has NOTHING to do with banking, trading, TBTF, or derivatives. It was a HOUSING BUBBLE!

    Duh!

  3. Its a little more nuanced than that: It was more of a credit than a housing bubble.

    As to the mortgage deduction, it has been around for nearly a century — why did it suddenly become problematic from 2003 – 07? The prior 90 years of problem free mortgage deductions. That strongly implies that the deduction was not a cause.

    The main issue is the abdication of lending standards during that period. 20% down payments, credit checks, employment history, income verification, loan servicing ability — these were the standards requirements for a mortgage that were abandoned during that period.

    The main culprits were the non-bank lenders who were selling their mortgages to Wall Street securitizers.

  4. snapshot says:

    BR – I agree. In the old days when banks held onto the paper, they had skin in the game and grilled every borrower – those days – gone.

  5. hankest says:

    Ok, so in this case the easy credit caused a “housing bubble.”

    So cognos is right, put back in place protections so lenders can’t happily hand out loans to any and all comers. But if you do that and then refuse to regulate banks/derivatives etc, all you’re doing is preventing another future housing bubble.

    So next time the banks will simply use the same tools to run a scam (i.e., inflate a bubble) on something else – god(Goldman) knows what.

  6. snapshot says:

    It wasn’t just the easy credit. It was the fact that the banks could pass that loan on the Freddie or Fannie.

    In the old, old days….. Banks made the loans for your house AND held onto the loan – it had to be a worthwhile buyer and dependable collateral.

    So you do have to cut off the “tools” they use to offload the risky loans or they will still take them on.

    If only we could go back to the days when the lender was responsible for the loans they made…they held the paper and made sure the loans passed the smell test. It stayed on their books. They had every incentive to make sure it was a worthwhile transaction.

  7. Tarkus says:

    “The main culprits were the non-bank lenders who were selling their mortgages to Wall Street securitizers.”

    Perhaps, but where did the money come from to pay the non-bank lenders? If Wall Street securitizers weren’t making nice profits, would they keep paying the non-bank lenders to continue making those loans while lowering their standards? Somebody has to provide the money to keep the game going.

  8. ACS says:

    Let us not forget the demand for those securitized loans, mortgage or otherwise, did not come from Wall Street (Wall Street was just the enabler), it came from the insurance companies, annuities, pension funds, endowments, etc that were desperate for yield thanks to the low interest rate policy of the FED. Kind of like… NOW!

  9. [...] There is still life in the Volcker Rule.  (WSJ also Big Picture) [...]

  10. snapshot says:

    ACS – And why did the pension funds and endowments get involved with these high-yield vehicles? Because they were miraculously labeled AAA by the rating agencies. There is plenty of blame to go around.

  11. So that is the rule….where is the loophole….there are always loopholes! :evil:

  12. Tarkus says:

    “ACS – And why did the pension funds and endowments get involved with these high-yield vehicles? Because they were miraculously labeled AAA by the rating agencies. There is plenty of blame to go around.”

    And who paid the ratings agencies? Somebody has to provide the money to keep the game going.
    So as ACS said, the insurance companies, annuities, pension funds, endowments etc were the junkies looking for a yield-fix, and the non-bank lenders were growing the plants. What about the guy in the middle?

  13. bsneath says:

    The main issue is the abdication of lending standards during that period. 20% down payments, credit checks, employment history, income verification, loan servicing ability — these were the standards requirements for a mortgage that were abandoned during that period.

    The 2004 SEC ruling that allowed investment banks to increase leverage from 12 to 1 to 30 or 40 to 1, coupled with the philosophy of self-regulation were two of the main catalysts for the abdication of lending standards.

    When these banks suddenly were given the authority to expand their portfolios by a factor of nearly three, their capacity to take on additional investments exceeded the available amount of reasonable investment opportunities. Rather than selecting the strongest from a pool of assets as they would have done prior to the rule change, they had the capacity to select all. When this was not sufficient they lowered lending standards to create more. When even that was not enough, they turned to synthetic products.

    SEC Leverage Rule Change Contributed To Investment Bank Failure
    http://www.parapundit.com/archives/005558.html

  14. flipspiceland says:

    @ACS

    Let’s also not forget that a product desgined to FAIL, epically, should be judged as an unmitigated criminal fraud and those designing and selling he held accountable for the damage it caused.

    No product that I know of in any other industry would be permitted a pass were to be found out that it was specifically concocted to fail, as j. Paulson and Goldaman Sucks (as well as the others–Merrill, BoA, Lehman, Bear etc.) .

    BP is going to pay dearly for their error, which is unlikely to be judged intentional. They may even be put out of business for good with the damages they must pay for.

    If Toyota was making a product that WAS intentionally designed to fail, they would be put out of business with all the laswsuits that would drown them. They are already repairing their products and paying fines withint months of it being discovered that made a product that wasn’t INTENTIONALLY
    designed to fail.

    The Squids and all the others who purposely assembled toxic products should be no less harshly.

  15. fsl,

    that’s a good point, re: “No product that I know of in any other industry would be permitted a pass were to be found out that it was specifically concocted to fail..”

    the only Industry (*Racket), outside of the Government, explicity given a, partial, Immunity Pass is Big Pharma..
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Liability+Immunity+for+Vaccines

    Toyota, et al., even after myriad Gov’t Rules & Regulations .. http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=DOT+NHTSA+safety+regulations+for+new+cars , are, ask the Trial Lawyers Bar, on the Hook for their Products..

    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Trial+Lawyers+Class+Action+Lawsuits+Toyota+NHTSA
    ~~
    but, instead, We get “Bag” Holder doing his job, this way: Via: New York Times:

    The Obama administration is seeking to compel a writer to testify about his confidential sources for a 2006 book about the Central Intelligence Agency, a rare step that was authorized by Attorney General Eric H. Holder Jr.

    The author, James Risen, who is a reporter for The New York Times, received a subpoena on Monday requiring him to provide documents and to testify May 4 before a grand jury in Alexandria, Va., about his sources for a chapter of his book, “State of War: The Secret History of the C.I.A. and the Bush Administration.” The chapter largely focuses on problems with a covert C.I.A. effort to disrupt alleged Iranian nuclear weapons research…
    http://cryptogon.com/?p=15080

  16. ACS says:

    My point was not to exonerate any of the multiple perpetrators who have been well chronicled here but merely to emphasize that the “patient zero” of the epidemic was Alan Greenspan.

  17. DL says:

    flipspiceland @ 2:08

    “Let’s …not forget that a product designed to FAIL, epically, should be judged as an unmitigated criminal fraud and those designing and selling he held accountable for the damage it caused”.

    I don’t know about “designed” to fail, or how one apportions blame between (a) the mortgage originators, (b) the people who lied on their mortgage applications, (c) the ratings agencies, and (d) the investment banks that sold them. Actually, of the four groups, I would probably place the least blame on the investment banks that made the decision to sell MBS’s and CDO’s.

    Also, I don’t see GS as being worse than any of the other investment banks merely because GS also had short positions. If anything, we should be glad that they made an attempt to limit risk, and hence could probably have survived without a government bailout.

  18. DL,

    see: “Lehman Was the Leading Purveyor of Liar’s Loans in the World” — Incidents of Fraud at 90% — “Lehman Sold This to the World”
    April 23rd, 2010

    I also handled issues for the used-car-salesman-type ‘account executives’. Just before I left, the company switched loan origination systems. The people writing these loans were pissed because they were no longer able to get loans approved for people with fraudulent social security numbers. They would actually complain because the system was telling them that the would-be borrower was using a false/fake/invalid SSN.

    “The old system never gave me these problems. How am I supposed to get any work done?! I hate this new system.”

    But wait, there’s more.

    As part of my daily duties, I had to take remote control of the systems that these donkeys were using. Occasionally, (a couple of times per day, at least) I would see the credit summary screens for the loan applicants. The highest credit score I ever saw was something like 615. The lowest was 520. Sprinkled with bankruptcies, unpaid credit cards, default this, late that.

    Every once in a while, I’d chuckle and ask the person on the phone, “And this guy can buy a $400,000 house with no money down!?”

    Absolutely God damned right!

    That’s what this company did. All day. Monday through Friday.

    —Life Inside a Wall Street Chop Shop, from 2006

    Hint to investigators: Aurora was generating the high quality stuff! The Lehman entities that you should be looking at, if you really want a thrill, are Finance America and BNC Mortgage.

    Finance America was rolled into BNC and BNC was rolled into Aurora.

    With regard to Finance America, pay special attention to all of the loans that were originated with the ALE Systems software. If you’re looking for the most serious fraud, this is likely where the lowest hanging fruit are located….”
    http://cryptogon.com/?p=14935

    far too few, thanks! MSM~, realize that “Wall St.” vertically integrated their *foray into ~MBS..

  19. erb2 says:

    ACS Says: “Let us not forget the demand for those securitized loans, mortgage or otherwise, did not come from Wall Street (Wall Street was just the enabler), it came from the insurance companies, annuities, pension funds, endowments, etc ”

    Foremost amoungst the enablers were the politicians who responded to building, development and other interests that lobbied for more jobs and benign enforcement of standards, but the Supreme Court’s loosening the reigns on corporate campaign contributions will buy better ethics.  Who buys a bridge to no-where?

  20. DL says:

    MEH @ 6:25

    Yeah, I’d like to see Obama and his minions spend more time going after Lehman execs, and less time going after GS.

  21. flipspiceland says:

    @DL

    Are you writing that you don’t believe that Paulson put together a bunch of mortgages that he knew were going to fail and that Lord Blankfein agreed to sell them?

    What don’t you get about designed to fail???

  22. Carse says:

    Perhaps the most obvious area of contact that the public will have with behavioral finance, and certainly the most high profile is the occurrence of bubbles. According to most standard models of finance, bubbles shouldn’t really exist. Yet they have been with us pretty much since time immemorial. The first stock exchange was founded in 1602. The first equity bubble occurred just 118 years later–the South Sea Bubble…

    There is also the view that bubbles are somehow “black swans.” Taleb defined a black swan as a highly improbable event with three principle characteristics:

    1. It is unpredictable.
    2 It has massive impact
    3. Ex-post explanations are concocted that make the event appear less random and more predictable than it was.

    It would be terribly reassuring if bubbles were black swans; then we would be absolved from our behavior.

    However such a defense is largely an abdication of responsibility. The belief that black swans has found support at the highest levels. Both Alan Greenspan and Ben Bernanke have been proponents of this view as they continually argue that it was impossible to diagnose a bubble before it burst, and hence argued that the best a central bank can do is try and mop up after everything goes wrong.

    This is of course utter rubbish. It is an attempt to abdicate responsibility. Bubbles and their bursts aren’t black swans.

    They are “predictable surprises.”* Predictable surprises also have three defining characteristics:

    1. At least some people are aware of the problem.
    2. The problem gets worse over time.
    3. Eventually the problem explodes into a crisis, much to the shock of most.

    The problem with predictable surprise is that while there is little uncertainty that a large disaster awaits, there is considerable uncertainty over the timing of that disaster.

    From “The Little Book of Behavioral Investing:” James Montier; John Wiley & Sons, 2010
    *M.Bazerman and M Watkins, Predictable Surprises: The Disaster You Should Have Seen Coming and How to Prevent Them (Cambridge, MA: Harvard Business Press, 2004).

  23. Carse says:

    Prosecution, yeah, I’m for it.

    Maybe Lloyd Blankfein has a few good stories to tell us in his own defense!

  24. dsawy says:

    Insofar as this credit crisis has shown that large, monolithic, highly aggregated financial companies allow a problem to “flash over” between financial groups (eg, from trading companies to insurance companies, to commercial banks, to pension funds, etc), the Volcker rule would help. We should have firewalls between the speculative/trading portions of the finance sector and the “steady” portions of the finance sector. The speculative companies should be walled off so if they go belly-up, they go belly-up alone, without dragging down the parts of the financial companies we need to keep the economy going.

    Look back at the reason for the AIG bail-out: it was bailed out because (we were told at the time) there were a whole lot of pensions, life insurance, etc. contracts balled up inside AIG, and allowing AIG to fail would have been irreparable.

  25. censeo says:

    Friends have been asking me; “How are the banks making money? Nobody seems able to get a loan or a mortgage. But their profits are up and now they’re giving out bonuses?”


    This got me wondering. And checking around—using some of the ‘Move your Money’ resources, and public records, quarterly reports, and news about the activities of the top US banks.
What did I find? The top banks’ principal activity is in trading financial instruments, investing for the bank’s portfolio, and underwriting. These business lines show movement in banks’ financial reports, and are prominently placed in the financial media reporting. And lending? Lending is flat or off prior years. Deposits too, are flat or off. Bank fees… well, bank fees constitute a large contribution to the bottom line. (Too many younger people don’t seem to realize there is no legitimate reason for a properly functioning bank to charge fees when it holds your money.)


    None of these activities can be considered as fulfilling the conventional purpose of a commercial bank: taking deposits in and making loans on them, and profiting on the interest rate spread. Yes, this is Finance 101, but I wonder how many people realize it is the fundamental function of banking; that it is what they do, or are supposed to be doing.
What are these major banks doing? Well, what do they look like? Investment banks! Of course. It’s more fun dealing in financial instruments than taking my deposit of $100 and giving me 2% annual interest, then taking my deposit and lending it to you at 4%. Ever heard of a Harvard MBA yearning for a job at the corner savings bank. WALL STREET.

    The reason for separating commercial banking and investment banking is as current now as it was in 1933. It is what made commercial banking boring and secure, and allowed the controlled evolution of finance by investment bankers. Each is a leg upon which the economy stands. You cannot combine the two legs into one fatter leg and contend that this single leg’s substance and size is stable, as did Sandy Weill, et. al.; thus the fateful Banking Act of 1999. It took 9 years for Fat Leg to topple. There are no more Wall Street banks. The couple that didn’t collapse in bankruptcy or into the arms of BofA became bank holding companies. Thus, they were taken under the great and dark wing of the Federal Reserve. Step up to the window for some $$$. No questions asked for the time being.

    So back to the question: how are banks making money. Answer: scamming the economy. Not you. Not me. Everything and everybody, including themselves. Apres mois, le deluge.

To understand how banking and finance are best treated check out Paul Volcker, ex-Fed chair and Sheila Bair, current FDIC chair. It ain’t complicated either.

    http://censorabsurdum.blogspot.com/2010/02/how-are-banks-making-money.html

  26. bman says:

    @Cognos, I agree plus
    6 -Tax them. tax each and every one of the greedy bastards until they give their shirts away to save on taxes.

    It wasn’t just a housing bubble.

  27. advocatusdiaboli says:

    Not only does BR find great material for his blog but he also adds cogent analysis and forceful advocacy–all done with a unique style of writing with a typo here and there–as I’d expect (and easily overlook) given his fast-on-the-trigger style. Then he write gems like this: “Consider what their spokesbitch, Rob Nichols, recently bleated:”. Beautiful BR. I am Lovin’ it ™.