“Without substantial revisions, the proposed rule will define permitted market making-related, underwriting and hedging activities so narrowly that it will significantly limit our ability to help our clients,” John F.W. Rogers, Goldman Sach’s chief of staff, said in a comment letter.“Although one of the key aims of Dodd-Frank was to promote greater stability in financial markets, we are concerned that the proposed rule could inadvertently increase systemic risk,” he added. If the rule makes hedging more expensive, “banking entities’ clients and customers will be forced to hold more risk on their own books.” (Bloomberg)
But as Abigail Caplovitz Field states in Reality Check, Paul Volcker himself fought for a return of Glass-Steagall which separated investment banking from commercial banking. Ever since the financial crisis, Goldman and other banks have lobbied against the Volcker Rule with all its various rules and regulations (and occasional loopholes).
Field makes a good argument for reinstatement of Glass-Steagall:
The Real Volcker Rule: No Gambling with the Public's MoneyFormer Fed Chair Paul Volcker fought incredibly hard for something much more powerful than even a strong version of the so-called Volcker rule. Volcker pushed for a return of Glass-Steagall, a law that until 1999 prevented the public financing of Wall Street gambling. Glass-Steagall/Volcker-for-real stands for the idea that when a company’s cash (deposits) is guaranteed by the government and the company has access to incredibly cheap government money, under no circumstances can the company be allowed to gamble with it.
Let’s be clear: Glass-Steagall wouldn’t prevent gambling addicts like Jamie Dimon from losing big bets. Crucially, however, Glass-Steagall would make the cost of placing those bets market rate, and make the gambler’s shareholders take the loss.
It’s a tremendously sad testament to the power of the banks that first they killed the return of Glass Steagall in favor of a ban on gambling for their own profit (a strong Volcker rule) and then used their lobbying prowess to eviscerate the rule.
FDIC Vice-Chairman Renews Glass-Steagall Push
Well, common sense is rising again. Shahien Nasiripour of the Financial Times interviewed Thomas Hoenig, Vice Chair/second in command at the FDIC recently, and Hoenig said
“that broker-dealer activities [that is, trading in the markets] should be cleaved off from banks, particularly large, systemic financial institutions.”That is, Hoenig called for a return of Glass-Steagall. Why? Because
“’In a crisis, who will absorb the loss?’”In case you’re not sure, the answer is you, me, and hundreds of millions of others. Not that we share in bankers’ profits, of course, just the losses.
Hoenig then pointed out the obvious, foreshadowing Jamie Dimon’s mea culpa:
“‘If management cannot adequately monitor and control their risk, it is unreasonable to expect supervisors to do so in their place,’”Glass-Steagall is the key to preventing future bailouts because it makes the implicit government guaranty the big banks now have less credible. See, right now, between the FDIC and the discount window, there’s a mechanism in place to honor the implicit guaranty. Spin off the trading operations, and we’re back in overt bailout territory, a political minefield many won’t walk through again. As Hoenig explained the guaranty that is the only reason the bailed out banks’ trading operations haven’t yet bankrupted the banks:
“without government support, Mr Hoenig argued…investors and counterparties would then appropriately price for the risk that these institutions could fail, eventually leading to more disciplined trading and less risky activities.“I’m not impressed by the markets’ smarts, but I’m very impressed by its harshness,” Mr Hoenig said.”
Read the entire article here