March 29, 2023

Economix Blog: Simon Johnson: Last-Ditch Attempt to Derail Volcker Rule


Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

In a desperate attempt to prevent implementation of the Volcker Rule, representatives of megabanks are resorting to some last-minute scare tactics. Specifically, they assert that the Volcker Rule, which is designed to reduce the risks that such banks can take, violates the international trade obligations of the United States and would offend other member nations of the Group of 20. This is false and should be brushed aside by the relevant authorities.

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Perspectives from expert contributors.

The Volcker Rule was adopted as part of the Dodd-Frank financial reform legislation in 2010. The legislative intent was, at the suggestion of Paul A. Volcker (the former chairman of the Federal Reserve Board of Governors), to limit the kinds of risk-taking that very large banks could undertake. In particular, the banks are supposed to be severely limited in terms of the proprietary bets that they can make, to lower the probability they can ruin themselves and inflict great damage on the rest of society. (For a primer and great insights, see this commentary by Alexis Goldstein, a leader of Occupy the S.E.C.)

The Volcker Rule is almost finished winding its way through the regulatory process, and a version should be implemented soon. But in a last-ditch attempt to block it, the United States Chamber of Commerce has sent a letter to the United States Trade Representative asserting:

The Volcker Rule is discriminatory, as foreign sovereign debt is subject to the regulation, while Unted States Treasury debt instruments are exempt. This creates a discord in G20 and invites foreign governments to retaliate at a time when we need those same regulators in foreign countries to support initiatives to liberalize trade in financial services. Further, U.S.T.R. should conduct a very close examination to ensure the Volcker Rule does not violate any of our trade obligations.

This statement is correct with regard to the point that there are exemptions in the current version of the Volcker Rule for banks’ holdings of United States government debt, i.e., there are fewer restrictions on their holdings of Treasury obligations than on their holdings of foreign government debt.

But the idea that this violates the spirit or letter of our international obligations is flatly wrong. Perhaps that is why the letter doesn’t point to any particular provisions of any specific trade agreements.

As a matter of basic principle, there is no violation, because there is no provision in any trade agreement that says United States banking regulators can’t protect our financial system by engaging in prudent regulation. To the contrary, nations have always been allowed to restrict what their banks can regard as safe assets, and thus effectively to limit their holdings of foreign assets.

Think of it this way. Would we want United States banking regulators to be prohibited from distinguishing between United States debt and that of Greece, Ireland, Spain or Italy?

In practice, this distinction among countries already occurs. For example, the Basel II equity capital requirements allow every country to treat the debt of other governments with some caution (although, without doubt, more caution is needed than was actually used in the past, or even than is encouraged under the new Basel III agreement).

Some Canadian officials, for example, have said that Canadian government debt should receive equal treatment with United States government debt. This is a dangerous proposal. Canada has ridden the recent commodity price boom and, to many observers, its real estate looks pricey. Do Canadian banks have enough loss-absorbing capital to weather whatever storms lie ahead – if China slows down or energy prices fall for some other reason? They had trouble in the 1990s, when commodity prices fell sharply. Why should American regulators allow our banks to take on a huge amount of Canadian risk?

Markets love a country until five seconds before they hate it. Surely we should have learned that by now, including from the European crisis.

We should continue to regard euro-zone debt with great suspicion. The euro-zone sovereign debt crisis may be over, and Greece’s bond rating was upgraded sharply by Standard Poor’s this week. On the other hand, S.P. and other ratings agencies have been wrong – and to a spectacular degree – in the not-too-distant past, including being overly optimistic about European sovereign debt and residential mortgages in the United States.

The Volcker Rule, and its international counterparts, like “ring fencing,” are forms of re-regulation, to be sure. Based on harsh recent experiences, countries are backing away from letting their banks and other people’s banks run unfettered around the world, taking on whatever risks they like and getting themselves into complicated legal and financial difficulties.

We need to reduce excessive and irresponsible risk taking throughout our financial system. The Volcker Rule is a significant step in the right direction. It is time for the regulators to finish the job.

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You’re the Boss Blog: This Week in Small Business: GoDaddy Goes Dark


A weekly roundup of small-business developments.

What’s affecting me, my clients and other small-business owners this week.

The Economy: The Fed Makes Its Move

Economic growth in the third quarter is forecast to be slightly stronger, and the Federal Reserve announces another stimulus plan. The Treasury recovers bailout money from A.I.G. Barry Ritholtz questions the success of government bailouts: “By most measures, the bailouts did stabilize the system and prevented another Great Depression (so far). … However, there are legitimate criticisms of the societal costs of these bailouts, about the collateral damage that it wrought.” Moody’s warns of a cut in the United States credit rating. An economics blogger says we’re not heading toward a fiscal cliff. The United States Chamber of Commerce’s chief economist says we’re staring down the barrel of a recession. Manufacturing profits are 35 percent above prerecession levels, but a new poll finds that manufacturers remain anxious. A strong holiday season is forecast. Some researchers fear growth in the informal economy.

The Big Story: A Subtle and Sublime Phone

The charms of Apple’s new iPhone are “subtle and sublime.” One observer says the device includes a new feature that will give shape and purpose to previously empty and meaningless lives. CollegeHumor pokes fun. Morgan Stanley says the new iPhone could add half a percent to gross domestic product, but Jacob Goldstein says not to believe it. Here is Gizmodo’s full rundown of the day. But is the phone being built by forced labor? A Chinese company makes a play to become the world’s largest smartphone maker. Smartphone shipments will pass one billion in 2016.

Technology: GoDaddy Goes Dark

A blackout at GoDaddy affects thousands of small-business Web sites. Solar power is rocking it. A vending machine swindler gets two years in jail. Here are five technology events that are affecting small businesses. QuickBooks introduces a new product for the Mac. How about this idea for cutting payroll: a remote-controlled robot that video-chats with those it encounters and peers into the spaces where it roams. Which is better: storage software or hardware? And even inside Microsoft, users rarely “Bing it.”

The Election: A Republican Bear Hug

A business blog outlines what’s at stake for the economy, and Diana Ransom begins a series analyzing the issues affecting entrepreneurs. Small-business optimism rises but a report by the National Small Business Association finds that small-business owners are less optimistic about the outlook of their own companies and the overall economy than in the previous six months. Leaders at the Small Business and Entrepreneurship Council talk about election-year issues. Ian Salisbury offers 10 things small businesses won’t tell you, including, “The tax code favors us — when we pay.” If President Obama wins another term, Robert Reich believes his biggest challenge will be getting consumers to spend. A Republican small-business owner in Florida gives the president a bear hug.

The Data: Home Sales Gain

Many cities’ August home sales show double-digit gains. Wholesale sales and inventories improve but producer prices rise. North Dakota oil production continues to set records. The trade gap widens. The July job openings and labor turnover survey gives a mixed view of job growth. Machine tool orders fall for the second straight month.

Marketing: Nokia’s Mistake

Darren Herman says five tech trends are changing marketing. John Parham shares five classic strategies for expanding your brand. Here are five lessons you can learn from Nokia’s marketing mistake. A new Pitney Bowes survey finds most small businesses are missing opportunities to reach customers. James Hughes tells an interesting history of ad jingles. Emily Suess suggests essential phone skills for business owners. Drew McLellan finds that e-mail click rates rates are rising. A theater chain uses Facebook to promote its mobile coupons. Here are five ways to spot a fake review online.

Social Media: Google Plus Has Swag

A new study finds that online networking is growing among small businesses. Grocery markets are going social. Philip Roth writes an open letter to Wikipedia. Robert Cringely is annoyed with LinkedIn. Tara Hornor says that Google Plus is a “station wagon with swag.” Attend this webinar to learn how nine companies are doing Facebook right. A new study finds that fewer than 20 percent of small businesses are using Twitter. Here are three strategies for social media marketing for business-to-business marketers. John Jantsch suggests five habits practiced by market leaders. And here’s how to deal with false third-party matches on YouTube.

Start-Ups: Latinos Lead

Small-business starts are highest among Latinos. A start-up wants to bring unused patents back from the dead. A start-up bus begins its tour of Maryland. This company wants to be the Zipcar of scooters. These are the three questions Yahoo’s chief asks start-ups. The “Uber of car maintenance” wins a TechCrunch Disrupt award in San Francisco.

Management: Crazy Busy or Fake Busy?

Mark Zuckerberg acknowledges missteps. Matthew Toren says it’s never too early to encourage your children’s interest in entrepreneurship. Meryl Evans wants to know if you’re crazy busy or fake busy: “It’s critical — not selfish — to take care of yourself first and keep your busyness under control.” Geoff Vincent suggests 10 steps for small-business planning. This guy is using bacon as currency. Schuyler Velasco says these are the companies we love in eight industries we hate. Here are a few under-the-radar industries where you can profit. Jim Connolly asks whether your customers would miss you if you weren’t there. A new book explains the science behind the entrepreneurial mind-set. Here are some amazing facts that will blow your mind.

Your People: Yelling Doesn’t Work

Ryder Cullison says yelling doesn’t work and shares five other workplace truths (but yelling does seem to work for this little girl). A retiring boss surprises his employees with thank-you checks. Did you know that green companies have more productive employees? Here’s a different way to judge if your company is one of the best to work for. Jay Goltz wonders whether it is a mistake to pick an employee of the month. A report from Deloitte reveals that 80 percent of employees plan to stay with their current employers in the next year. Here are nine keys to successful safety processes for your plant.

Around the Country: The Future

Is franchising the answer for job growth? An entrepreneur puts Detroit’s homeless to work making coats. A plane flies over 1941 San Francisco. Bloomberg ranks the most and least miserable states. Bend, Ore., could be the next big city for entrepreneurship. Lockheed Martin receives an award for its work with small businesses. Pennsylvania’s governor signs antiregulation legislation for small businesses. Expedia introduces a new reward plan, and Staples announces a disaster preparedness program. In October, the Singularity Summit will bring more than 800 thought leaders to San Francisco to discuss technological advances on the horizon, and the World Future Trends Summit will be in Miami. Oct. 2 will be National Encore Entrepreneur Mentor Day, and if you can name the female entrepreneur who inspires you the most, you might win a free ticket to a future Women 2.0 conference in New York.

Around the World: 54 Hours in Iran

Entrepreneurship flourishes for 54 hours in Iran. Car sales in India are down 19 percent. China’s industrial growth continues to slow, and these are four likely situations for its economy in 2013. A Malaysian car wash owner’s highly unusual marketing idea is shot down by the police. Britain is experiencing a surge in high-tech investment. Canada introduces a new visa for immigrant entrepreneurs. Russia looks to enter the tablet market.

Finance: A Cash Mob in Tennessee

Rob Russell has three questions for your financial adviser, including: “How well did you do in 2008?” Billy Patterson offers some personal finance tips for small-business owners. Odysseas Papadimitriou reveals the biggest credit card mistake entrepreneurs make. Here are six tips for running a layaway program. A representative from Score offers financing ideas for new businesses. A cash mob will infuse dollars into businesses in Cleveland, Tenn.

Tweets of the Week

@petershankman: The Simpsons first aired 25 years ago this week. We’re old. Have a nice day.

@badbanana: The new iPhone, while larger, is still not quite large enough to fill the hole in my soul. Excellent news for Hostess Brands.

@WarrenWhitlock: “An entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” — Peter Drucker

The Week’s Bests:

Ed Powers says private equity investors are looking for liquidity: “Liquidity is going to become more of an issue, because the private equity fund probably used some leverage to buy your company. Private equity managers will want weekly, monthly and quarterly cash flow models (perhaps even daily in a crisis) to make sure your company stays within the liquidity covenants negotiated with its lenders. It’s impossible to predict liquidity needs perfectly, but modeling helps avoid crises.”

Al Natanagara explains how to manage your team without turning into Bill Lumbergh, the manager in “Office Space”: “Don’t be too proud to get your hands dirty. One of the first things we learn as managers is how to effectively delegate work. Some managers take this to mean that everything outside of the strictest definition of ‘management’ should be done by employees, and this is a mistake. If you have skills that match any of your employees’, help out during crunch time. Get coffee for people every once in a while. Even something as simple as throwing away garbage or wiping up a spill can go a long way toward showing that even though you are higher up the corporate ladder, you are still a regular person like everyone else.”

This Week’s Question: Do you ever Bing it?

Gene Marks owns the Marks Group, a Bala Cynwyd, Pa., consulting firm that helps clients with customer relationship management. You can follow him on Twitter.

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DealBook: Court Ruling Offers Path to Challenge Dodd-Frank

Mary L. Schapiro, the S.E.C. chairwoman.Alex Wong/Getty ImagesMary L. Schapiro, the S.E.C. chairwoman, said the agency spent 21,000 staff hours drafting the proxy rule over two years.

A new front has opened in the behind-the-scenes battle over financial regulation.

Industry groups have been examining legal challenges to the Securities and Exchange Commission’s new corporate whistle-blower program and a provision surrounding the extraction of oil and natural gas from foreign countries, people briefed on the talks said. The Commodity Futures Trading Commission’s plan to curb speculative trading is also under fire.

The catalyst has been a federal appeals court decision in July striking down an S.E.C. rule that would have made it easier for shareholders to nominate company directors. The so-called proxy access rule stemmed from the Dodd-Frank act, the sweeping regulatory overhaul enacted in the wake of the financial crisis.

In recent weeks, lawyers and Wall Street trade groups have gathered in Washington to ponder the next big case. Lawyers branded one meeting, held by the United States Chamber of Commerce, as “Dodd-Frank Excesses,” according to two people who were notified of the meeting.

Until now, Wall Street relied largely on an army of lobbyists to chisel away at 300 new rules flowing from the S.E.C. and the Commodity Futures Trading Commission, among other agencies. But while lobbying might yield the occasional loophole, judicial rulings can halt new rules altogether.

“I would hope the agencies are taking to heart the potential consequences for Dodd-Frank rules,” said Eugene Scalia, the lawyer who won the proxy case on behalf of the Chamber of Commerce.

Hal S. Scott, a professor at Harvard Law School and a director of the Committee on Capital Markets Regulation, a research group that has been a critic of Dodd-Frank, said, “I do see lots of challenges coming down the pike.”

Regulators, reluctant to give in to industry pressure, are rushing to safeguard their rules from legal action. The commodity commission, having already delayed several Dodd-Frank rules for six months, is now studying the proxy case and considering adjustments to some proposed regulations, according to a person close to the agency. Earlier this month, the agency dispatched several staff members to meet with S.E.C. officials about the recent court decision.

For its part, the S.E.C. is weighing an appeal of the proxy ruling. The S.E.C. is also adding economists, planning to hire eight over the next two years, after the appeals court rebuked the agency for not fully evaluating the proxy rule’s economic effects.

The legal challenges are rooted in a 1996 law that requires the S.E.C. to promote “efficiency, competition and capital formation.” The law enabled the financial industry to build lawsuits around the economic costs of a rule, regardless of its merits.

In 2005, the Chamber of Commerce was the first business group to invoke the law, using it to successfully challenge certain S.E.C. rules for the mutual fund industry. The chamber later gained momentum with a string of similar victories in the United States Court of Appeals for the District of Columbia Circuit. Altogether, the appeals court has tossed out three financial regulations in the last six years, including the proxy rule.

Mr. Scalia, a partner at the law firm Gibson Dunn and the son of Supreme Court Justice Antonin Scalia, was on the winning end of each case.

Banks and corporations, rather than challenging the rules directly at the risk of alienating regulators, turn to seasoned litigators like Mr. Scalia and influential trade groups like the Chamber of Commerce to lead the fight. For more than 30 years, the chamber has had a separate litigation center, which operates as its own law firm in Washington.

“It is usually not in the interest of a single business to mount a claim,” said Brian G. Cartwright, the S.E.C.’s former general counsel who now works at the law firm Latham Watkins. “You need some cut-out man or organization that speaks for broad groups.”

The industry has shied from mounting a broader challenge to Dodd-Frank itself, finding it cheaper and easier to gradually chip away at the law’s fiercest provisions. Lawyers say a single lawsuit contesting the constitutionality of Dodd-Frank could take years — and millions of dollars — to wind through the courts, with little chance of succeeding.

“Dodd-Frank is not one thing but many,” said Margaret E. Tahyar, a partner at the law firm Davis Polk. “There is no reasonable constitutional or statutory challenge on the whole — only on the bits and pieces.”

By some measures, the proxy rule was an unlikely choice to challenge on economic grounds. The S.E.C. produced 60 pages on a cost-benefit analysis of the rule and spent 21,000 staff hours drafting it over two years, Mary L. Schapiro, the agency’s chairwoman, said in a recent letter to Congress.

That the proxy regulation still did not pass muster does not bode well for several other Dodd-Frank rules that received considerably less explication, sometimes only 25 pages, on their economic effects.

“The proxy case makes all the rules open target to challenge,” Mr. Scott of Harvard said.

Financial trade groups, according to several lawyers, are now considering suits against the S.E.C.’s corporate whistle-blower office, which opened last week. The chamber, at least, argues that the whistle-blower program allows tipsters to undermine internal compliance departments.

Industry groups are also looking at claims against a few more obscure Dodd-Frank provisions. One S.E.C. regulation requires companies to disclose whether they manufacture goods using so-called conflict minerals like gold from Congo.

Tiffany Company argued in a letter to the S.E.C. that the proposed rules “would violate the First Amendment,” laying the groundwork for business groups to mount a constitutional challenge.

Some letters are even blunter, as groups invoke the proxy case as a cautionary tale.

Royal Dutch Shell wrote the S.E.C. this month about “our expected costs” stemming from a proposal about oil extraction. Shell filed the letter, it said, “in light of the recent decision by the U.S. Court of Appeals.”

The commodity commission has received a barrage of hostile letters, too, some foreshadowing legal action. In March, the Futures Industry Association urged the commission to scrap its plan for reining in speculative commodities trading, saying it “may be legally infirm.”

Bart Chilton, a Democratic commissioner at the agency who has championed tough position limits on oil, corn and the like, sought feedback on the plan from the CME Group, the nation’s largest futures exchange. But at CME’s Chicago headquarters last fall, executives declined to discuss the proposal with Mr. Chilton, saying the Commodity Futures Trading Commission lacked the legal authority to impose trading limits.

With the industry firing such warning shots, regulators have spent months shielding their rules from litigation.

In May, the Commodity Futures Trading Commission’s general counsel and chief economist issued a memo spelling out guidelines for cost-benefit analyses. The memo and other efforts to slow down the Dodd-Frank rules later drew rare praise from the agency’s internal watchdog, which said the commission “has taken proactive steps to address concerns.”

Scott O’Malia, a Republican commissioner at the futures trading commission, also called for the agency to re-examine every cost-benefit analysis drawn up for Dodd-Frank. “The commission does not have the final word, as the S.E.C. has recently learned,” Mr. O’Malia warned this month.

Still, most regulators are hesitant to strike the panic button.

“We hear about potential lawsuits with some frequency,” Mr. Chilton said in an interview. “There’s an old saying in Washington that, if you’re not part of the solution, there’s plenty of money to be made being part of the problem.”

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