Last year, when the Dodd-Frank Wall Street Reform and Consumer Protection Act went to Congress, the Volcker Rule that it contained took up 10 pages.
Last week, when the proposed regulations for the Volcker Rule finally emerged for public comment, the text had swelled to 298 pages and was accompanied by more than 1,300 questions about 400 topics.
Wall Street firms have spent countless millions of dollars trying to water down the original Volcker proposal and have succeeded in inserting numerous exemptions. Now they’re claiming it’s too complex to understand and too costly to adopt.
Having read at least some of the proposed regulations — I made it through about five pages before sinking in a sea of acronyms — I can assure you that the banks are right about that. Even the helpful summary prepared by Sullivan Cromwell, a law firm that represents big banks and that has associates who no doubt wrote the summary over several all-nighters, runs a dense 41 pages.
In numerous interviews this week with people across the political spectrum, I couldn’t find anyone who actually supports this behemoth — including Mr. Volcker, whose name it bears.
“I don’t like it, but there it is,” Mr. Volcker told me in his first public comments on the sprawling proposal.
“I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I’d have strong regulators. If the banks didn’t comply with the spirit of the bill, they’d go after them.”
He says he likes the fact that the proposed regulations, complex as they are, make top management and boards responsible for compliance. “If they think it’s too complicated, they have no one to blame but themselves,” he said of the banks.
Do we need to go back to the drawing board?
“Here’s the key word in the rules: ‘exemption,’ ” former Senator Ted Kaufman, Democrat of Delaware, told me. “Let me tell you, as soon as you see that, it’s pronounced ‘loophole.’ That’s what it means in English.” Mr. Kaufman, now teaching at Duke University School of Law, earlier proposed a tougher version of the Volcker Rule, which was voted down in the Senate. “We’ve been through this before,” he said. “I know these folks, these Wall Street guys. I went to school with them. They’re smart as hell. You give them the smallest little hole, and they’ll run through it.”
“I support the concept of the Volcker Rule,” Representative Peter Welch, Democrat of Vermont, said, “but these rules aren’t going to be effective. We’ve taken something simple and made it complex. The fact that it’s 300 pages shows the banks pushing back and having it both ways.”
And these are Democratic critics of the proposed regulations. An overwhelming number of Republicans oppose them, as they have virtually every aspect of Dodd-Frank. Even Senator Richard Shelby, Republican of Alabama, the ranking member of the Senate Committee on Banking, Housing and Urban affairs, who was the lone Republican to support the tougher Brown-Kaufman legislation, dismisses the latest incarnation.
“This proposal, however, is filled with central questions that Congress should have answered before even drafting Dodd-Frank,” said Jonathan Graffeo, a spokesman for Senator Shelby. “Instead, Congress willfully ignored the ramifications of its actions, just as it did in repealing Glass-Steagall.”
Yet the Volcker Rule, or something like it, could be the most important reform measure to emerge from the financial crisis.
If there was any doubt about that, this week the Securities and Exchange Commission unveiled its latest charges involving mortgage-backed securities. In what may be a new low for conduct by a major Wall Street firm in the walk-up to the financial crisis, Citigroup settled charges (without admitting or denying guilt) that it defrauded investors by creating a package of mortgage-backed securities for which it selected a pool of mortgages likely to default, bet against the security for the bank’s benefit by shorting it and then foisted it off on unwitting investors without disclosing any of this.
According to the S.E.C., one trader characterized this particular security in an all-too-candid e-mail as “possibly the best short EVER!”
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