Tag Archives: Volcker Rule

Guess What The Senate Thinks Is More Important Than Children Killed By Semiautomatic Weapons?

And the answer is …. <drumroll please> … S. 2155, for March 5, 2018 on the Senate Calendar. (pdf)  By the way, the title of the bill sponsored by Senator Mike Crapo (R-ID) is the Economic Growth, Regulatory Relief, and Consumer Protection Act.  Put the emphasis on the “regulatory relief” part of that title, because it certainly isn’t on the consumer protection phrase in that title.  So, what is the Senate doing instead of taking on issues related to gun violence and weapons of war on our streets?

The bill amends the Bank Holding Company Act of 1956 to exempt banks with assets valued at less than $10 billion from the “Volcker Rule,” which prohibits banking agencies from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds. Certain banks are also exempted by the bill from specified capital and leverage ratios, with federal banking agencies directed to promulgate new requirements.

The bill amends the United States Housing Act of 1937 to reduce inspection requirements and environmental-review requirements for certain smaller, rural public-housing agencies.

Provisions relating to enhanced prudential regulation for financial institutions are modified, including those related to stress testing, leverage requirements, and the use of municipal bonds for purposes of meeting liquidity requirements.

The bill requires credit reporting agencies to provide credit-freeze alerts and includes consumer-credit provisions related to senior citizens, minors, and veterans. [Congress]

It’s hard enough to understand a Senate in which the answer to assault weapon violence is to require states and localities to enter information into the national database — information they are already required to submit — but it’s more important to them to let some banks get out of complying with the Volcker Rule (the bank can’t play investment games with depositors’ money.)

Instead of taking up bills to require universal background checks for the purchase of firearms in this bullet riddled country, it’s more important to the US Senate to discuss allow banks to get out from under capital and leverage ratios.

Instead of taking up bills to raise the age for firearm purchases the US Senate deems it of more importance to let some banks reduce inspection requirements and environmental-review requirements in rural areas — raising the question: Why should rural areas be less protected than urban ones?

Instead of debating bills to ban the sale of bump stocks to enhance the lethality of AR-15 and similar weapons of war, the US Senate thinks it is more important to allow some banks to skirt the demands of stress testing.

Instead of discussing how to stop the sale of weapons of war to civilians the US Senate believes it to be of more urgency to take a vote on easing the restrictions on proprietary trading….

Instead of taking action on bills to reduce the likelihood of additional carnage in our public spaces, or in the privacy of our homes, the United States Senate would far rather roll back consumer protections enacted in the wake of the Housing Bubble Debacle.

This is nothing less than the absence of national leadership and the abdication of morality.

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Filed under Economy, financial regulation, Gun Issues, Politics

Wall Street May Not Be The Enemy: It’s the friends we need to watch

“Wall Street” is an extremely elastic catch phrase, useful for politicians of all stripes.  For example, we have Senator Dean Heller (R-NV) reminding us at every possible moment that he “voted against the bail out.” And, we have politicians from the other side of the aisle excoriating the traders for all the ills of modern America.  Both are off the mark.

Wall Street sign

First, beware the thinly veneered populism of Senator Heller.  Yes, he did vote against the bailout – an extremely safe vote at the time – but, NO he hasn’t stopped being the Bankers’ Boy he’s always been.  Let’s remember that while he was offering himself as the Little Guy’s Candidate he was voting on June 30, 2010 to recommit the Dodd-Frank Act to instruct conferees to expand the exemption for commercial businesses using financial derivatives to hedge their risks from the margin requirements in the bill.  Then, on June 30, 2010, he voted against the conference report of the Dodd-Frank Act.  Heller wasn’t finished.

In 2011 he and then Senator Jim DeMint (R-SC) introduced S. 712 – a bill to repeal the Dodd-Frank Act.

“What S. 712 does is to (1) repeal measures which require banks to have a plan for orderly liquidation (another word for bankruptcy), (2) repeal requirements that banks keep records of transactions which would need to be transparent in case an “orderly liquidation” is in order, (3) repeal the establishment of an oversight committee to determine when a bank is becoming “too big to fail,” and is endangering the financial system — an early warning system if you will.  The new requirements governing (4) Swaps would also be repealed, along with the (5) Consumer Protection bureau.” [DB 2011]

Few could have been more obviously promoting the interests of Wall Street traders than Heller and DeMint. [DB 2012]  Few could have been more readily apparent in their enthusiasm to protect the financialists from the provisions of the Dodd-Frank Act including the Volcker Rule.

Volcker Rule

A word about the Volcker Rule:

“The Volcker Rule included in the Dodd-Frank Act prohibits banks from proprietary trading and restricts investment in hedge funds and private equity by commercial banks and their affiliates. Further, the Act directed the Federal Reserve to impose enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities. Congress did exempt certain permitted activities of banks, their affiliates, and non-bank institutions identified as systemically important, such as market making, hedging, securitization, and underwriting. The Rule also capped bank ownership in hedge funds and private equity funds at three percent. Institutions were given a seven year timeframe to become compliant with the final regulations.” [SIFMA]

Yes, Senator Heller et. al., if the Dodd-Frank Act is repealed then the financialists on Wall Street may go back to gleefully trading all manner of junk in all kinds of packaging with no limits on bank ownership of hedge and private equity funds.  Let’s remind ourselves at this point that capitalism works.  It’s financialism that’s the problem.  Under a capitalist form of finance resources (investments) are moved from areas (funds) with a surplus to areas (businesses) with a scarcity of funds.  Under a financialist system capital (money) is traded for complex financial instruments (paper contracts) the value of which is open to question.  Not to put too fine a point to it, but the “instruments” seems to have whatever value the buyer and seller agree to whether the deal makes any sense or not.  The Dodd-Frank Act doesn’t forbid “financialism” but it does put the brakes on.

Notice, it puts the brakes on, but doesn’t eliminate the old CDOs.  Nor does it prevent the CDO with a new name: The Bespoke Tranche Opportunity.  It works like this:

“The new “bespoke” version of the idea flips that business dynamic around. An investor tells a bank what specific mixture of derivatives bets it wants to make, and the bank builds a customized product with just one tranche that meets the investor’s needs. Like a bespoke suit, the products are tailored to fit precisely, and only one copy is ever produced. The new products are a symptom of the larger phenomenon of banks taking complex risks in pursuit of higher investment returns, Americans for Financial Reform’s Marcus Stanley said in an email, and BTOs “could be automatically exempt” from some Dodd-Frank rules.” [TP]

Zero Hedge summed this up: “This is the synthetic CDO equivalent of a Build-A-Bear Workshop.” We’re told not to worry our pretty little heads about this because, gee whiz, CDOs got a bad reputation during the Big Recession of 2007-2008, when they were just “hedging credit exposure.”  Yes, and ARMs got a bad reputation when they were just putting people in houses… Spare me.

And, we’d think that after the CDO debacle of 2007-2008, some one might have learned something somehow, but instead we get the Bespoke Tranche Opportunity and a big bubble in really really junky bonds.   That would be really really really junky bonds:

“Junk bonds are living up to their name right now. As we have noted in the past, the lowest-rated junk bonds may have inflated a $1 trillion bubble at the bottom of the debt market. The thing is, it never should have gotten that way.” [BusInsider]

Indeed, back in the bad old days no one could issue CCC bonds.  Now, we have Central Banks supporting Zombie Companies, low yield Treasuries making investors look to more “speculative” debt, and more demand for high yields meant that purveyors of Junk found a market for their garbage. [BusInsider] And, of course, someone out there is hedging all this mess.

Lemmings Here we meet the second problem with financial regulation in this great country.  Not only would the Bankers’ Boys like Senator Heller like to go back to the days of Deregulation, but the Financialists are hell bent on Yield! High Yield!  Even if this means supporting Zombie Companies which should probably just die already; even if this means allowing the sale of Bespoke Tranche Opportunities; and, even if this means selling bonds no one would touch only a few years ago.  The quarterly earnings report demands higher yields (As in: What Have You Done For Me In 90 Days Or Less) and investors jump like lemmings off the cliff.

We’ll probably keep doing this until someone figures out that in these schemes the chances are pretty good that “getting rich fast” more often means going broke even faster.  Thus the financialists package Bespoke Opportunities and C (for Crappy) Bonds.

Said it before, and will say it again:’  What needs to be done is —

  • Continuing to restrict the activity of bankers who want to securitize mortgages, under the terms of existing banking laws and regulations.
  • Continued implementation of the Dodd-Frank Act.

To which we should add, “restrict the creation and sale of artificial “investment” paper products which add nothing to the real economy of this country, and instead soaks up investment funds, and creates Bubbles rather than growth.


Read more atSIFMA, “Volcker Rule Resource Center, Overview.” Desert Beacon, “Deregulation Debacle,” 2012.  Desert Beacon, “Full Tilt Boogie,” 2011.  Think Progress, “High Risk Investments,” 2015.  Zero Hedge, “The Bubble is Complete,” 2015.  Bustle, “Is the ‘Big Short’ Right?, 2016.  Bloomberg News, “Goldman Sachs Hawks CDOs,” 2015.  Huffington Post, “Big Short, Big Wake Up Call,” 2016.  Market Mogul, “BTO, Deja Vu” 2016.  Business Insider, “Trillion Dollar Bubble,” 2016.  Business Insider, “Bubble Ready to Burst,” 2016.  Seeking Alpha, “OK, I get it, the junk bond miracle rally is doomed,” 2016.  Wolfstreet, “CCC rated junk bonds blow past Lehman moment,” 2016.

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Filed under Economy, financial regulation, Nevada politics, Politics

Blubber Blubber Oil and Trouble?

Electricity consumers in northern Nevada can expect to pay about $9.25 in basic service charges, and $75.17 for 745 KWH of power per month.  [NVenergy pdf] There are some other charges which would increase a basic monthly power bill to approximately $84.20.   The average price for a gallon of ‘regular’ unleaded gasoline in Nevada is now $3.509. [NGP] So, what is the connection between Wall Street and the price of turning on the air conditioner or filling the gas tank in Nevada?

Electricity and oil are commodities.  Commodities are traded. Derivatives based on the value of the commodities are traded.  The key word here is value.  What’s the value of a barrel of oil? Of a megawatt of power?  So, Nymex Crude futures say the value of a barrel is now $87.43.  [Bloomberg] From Bloomberg’s reporting we know that a megawatt of power (Palo Verde on peak spot) is valued at $29.71 and Ercot Houston is now at $28.92.  [Bloomberg]  If value = price then we know the value of the oil and the megawatt of power.

The factors which affect the price of a barrel of oil or a megawatt of electricity are knowable for the most part, including production costs, transportation costs, personnel costs, and so on.  What is more difficult to assess is the role played by speculation in the energy markets.  This is where the banks come on stage.

If banks are buying and trading oil and electricity these transactions are classified as Physical Commodities, and JPMorgan has been engaging in some physical transactions.  Here’s an example:

In joining private equity firm Carlyle Group to help rescue Sunoco Inc’s Philadelphia plant from likely closure, the Wall Street titan cast its multibillion-dollar physical commodity business as an essential client service, financing inventory and trading on behalf of the new owners. [Reuters]

Sounds good, JPMorgan and the Carlyle Group saved a plant and traded  the physical commodity, in this case oil, on behalf of the new owners of the Philadelphia Sunoco plant.  However, now we get to the sticky part (pun intended.)

Do we want banks to dabble in “physical commodity forwards?”  A physical commodity forward in the simplest possible terms is a non-standardized contract between two parties to buy or sell an asset at a specified future date for a price agreed upon today.   But wait, there’s more.

A commodity forward can also be used to hedge risk (as in interest rate, or exchange rate risk), to allow one party to take advantage of an element of the contract that’s time sensitive, or … (you guessed it) to speculate.  If the commodity forward is a non-standard contract, then how can it be regulated to minimize the systemic risk involved in the speculation, or betting operations, which can devolve from Wall Street’s engagement in the commodity forwards markets?  We’ve had a taste of this during the Credit Crisis of ’08 when exotic derivatives turned into toxic assets.

The Volcker Rule was supposed to prevent bankers from indulging their acquired taste for gambling on a host of non-standard contracts like derivatives, including bets on the prices for commodities — as in electricity and oil.  But, what do we do when the commodity forward isn’t really a swap, because in that type of transaction money but not the actual commodity changes hands, and  what if it’s not really a spot market transaction because the contract is long term?

The Reuters article explains this problem succinctly:

“Unlike a swap, which will be settled between counterparties on the basis of an underlying financial price, a forward will usually turn into a real asset after time. Unlike hard assets, however, the forward contract can be bought or sold months or years before the commodity is produced or stored.”

Now we have transactions which are neither fish nor fowl.  What might be the result if more energy producers outsourced their financing to Wall Street?  There are already three, very familiar, very big players on The Street: JPMorgan, Goldman Sachs, and Morgan Stanley, all three of which received taxpayer relief the last time their derivatives trading went south of Penguin Territory.

Trust But Verify?

The bankers are arguing that there should be no restrictions on commodity forwards because they are acting on behalf of their clients.  Some smaller energy producers and regulators argue that these same contracts and the derivatives thereof could be easily used to trade on price differences without the oil or electricity going anywhere.  The word “evasion” appears in the article.

It would be lovely to be able to take the bankers’ word for it, that they have learned their lessons from 2008 and “repositioned” their books away from commodity gambling activities, and are operating solely for the benefit of their clients.  In that case they could be exempt from the Volcker Rule.

The London Whale couldn’t have been harpooned at a more unfortunate time for the bankers.   Just when, as in the Sunoco example, they might have made their case that they are trading solely on behalf of their clients and with the client’s best interests at heart, the Whale cannon balls into the pool. His haven’t been the only waves.

Tuesday, July 3, 2012: “The Federal Energy Regulatory Commission (FERC) on Monday filed a petition in U.S. federal court to require JPMorgan to produce emails as part of a formal probe into JPMorgan power market bidding practices in those areas.”  [Reuters]

Oh good. No sooner does the wave action abate from the Whale Plunge to $9 billion in potential losses, but the FERC is “formally” probing into power market bidding — making it all the more difficult to sustain the argument that Wall Street bankers should not have to PROVE their transactions are client based because this would be “onerous.”    Additionally, there are still some waves coming from across the pond.

Barclays CEO Robert Diamond resigned in the wake of the LIBOR rate rigging scandal.  [IndepUK] His resignation was bemoaned by some bankers, others were more forthcoming:

Speaking at the FSA’s annual meeting, chairman Lord Adair said the Libor scandal had caused a huge blow to the reputation of the banking industry. “The cynical greed of traders asking their colleagues to falsify their Libor submissions so that they could make bigger profits has justifiably shocked and angered people, in particular when we are facing hard economic times provoked by the financial crisis,” he said. [IndepUK]

These are not the comments one wishes to hear while strenuously arguing that more regulation of commodity trading and other proprietary trading operations are in the “client’s best interest.”

The City of London has been quite proud of its reputation as an “easy” place for financiers to do business.  Politicians were pleased to reign with a “soft touch,” which now seems to be light years distant, while major UK parties try to distance themselves from the Whale and the LIBOR backwash.

Trust is not advanced by having four major UK banks enter into a settlement with the FSA concerning the mis-selling of interest rate swaps to small businesses as a condition of further credit, a mere four days ago.  [BBC] [FSA]  Nor is trust earned by having the Whale, the LIBOR, and the Interest Rate Swaps, coming a year after the resolution of the PPI scandal. [Risk]  The British Bankers Association might now be wishing that there had been at least an pine fist inside the velvet glove of oversight and regulation?  That might have spared the bankers this ringing attack from the FSA:

“There are no free lunches, and shoddy wholesale practice is not a victimless act, even in those cases where it is not defined as a crime,” Turner said today. Banks and regulators must determine “how to purge the industry of the culture of cynical entitlement which was far too prevalent before the crisis.” [BusWeek]

Lest we take any comfort in the notion that all the icky stuff resulting from a “culture of cynical entitlement” takes place Over There, British banks weren’t the only ones being investigated in the LIBOR mess.  The traders involved were based in both London and New York; the City of Baltimore, Maryland filed a lawsuit, as did Charles Schwab in California, and the investigations and litigation don’t stop there.

“At least 16 of the world’s biggest banks, including UBS, Deutsche Bank, Citigroup, HSBC, RBS and Lloyds, are likely to be looked at by the FBI or other US federal agencies. As well as Britain and the US, investigations are taking place in other European countries, Japan, Canada and Singapore.”  [DailyMail]

If trust were a commodity, trust prices in the global banking system would be sinking.   While the bankers are displaying their  “culture of cynical entitlement,” they are simultaneously asking the American public and U.S. regulators to “trust” them not to use commodity forwards in ways to evade oversight and hide questionable transactions. We are asked to take their words at face value that they are working only for the betterment of our economy and the benefit of their clientele.

We’re left to ask: How much of what they are saying is Whale Oil, and how much is Blubber?

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Word Salad Shooting At The Volcker Rule

The Big Banks don’t like the Volcker Rule.   For reference, and so we’re all talking about the real thing, here’s the little culprit: The Volcker Rule “separates investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. Banks are not allowed to simultaneously enter into an advisory and creditor role with clients, such as with private equity firms. The Volcker rule aims to minimize conflicts of interest between banks and their clients through separating the various types of business practices financial institutions engage in.”  [investopedia]


We can simplify this further.  A bank, insured by the FDIC, may not combine their proprietary trading activities with their consumer lending ones.   And, why do we need the Volcker Rule?

“The Volcker Rule seeks to keep activities essential to banking within a safety net, while excluding other, riskier, activities from this safety net. There are a variety of special regulations, and protections, banks get, ranging from federal deposit insurance (known as FDIC) to access to the Federal Reserve’s discount borrowing window, designed to keep the system working through panics. Banks currently engage in a wide variety of non-banking activities with safety net protection. For example, they speculate in currencies and run hedge funds and proprietary trading desks for their own benefit. These activities made the financial crisis worse; one estimate has the major Wall Street firms suffering $230 billion dollars in prop trading losses a year into the crisis. And right now, these activities are subsidized by access to the banking safety net.”  [Nation]

So, the message to the Big Banks is relatively clear:  Your consumer lending activities on behalf of your clients are covered by the “safety net” (FDIC coverage or access to the Fed’s discount window) BUT your hedge funds and proprietary trading desks aren’t.

Slicing and Dicing

Opponents of the implementation of the Volcker Rule make some basic points, all of which deserve more scrutiny.  (1) They argue that the rule making process is creating “uncertainty” because we don’t know what the final rules will be.  The word “tautology” comes to mind because this argument circles back on itself nicely, as in ‘ we can’t make rules because while we’re drafting the rules we don’t know what the rules are.’  If we applied this argument to any other phase of life there would never have been any rules.

Here is an example of the tautological thinking:

“Since neither the banks nor the regulators have any idea what the final regulations will say, they will have no idea what constitutes good faith efforts to comply. Because of the continuing confusion and its effects on the financial system, Congress should immediately begin a serious re-examination of the Volcker Rule’s likely effect both in this country and abroad and repeal it as quickly as possible.”  [Heritage]

Why bother to “seriously re-examine” the rule if the initial purpose is to quickly repeal it?  Imagine for a moment waiting for Moses to return from the mountain.  If our moral judgments aligned with the Uncertainty Proponents we’d not necessarily know that we shouldn’t dispatch each other because we’d have to know in advance if the Almighty intended to incorporate justifiable homicides or excusable homicides, manslaughters or negligent homicides, within the proscription of killing each other — and, further, we couldn’t have a Rule until all of these nuances had been properly phrased and found to be acceptable to all the stakeholders.

(2) A more cogent argument against devising regulations pertaining to the Volcker Rule asks:  How do specific short term banking services apply to the separation of traditional banking and modern client services?   At this point we get into the “liquidity” swamp.

Suppose the executives of SlamBang Corp. want to purchase some stocks for the purpose of generating some revenue for the firm by going to its banker and asking the bank to make the purchase, hold on to the stocks, and if the price of the stocks goes up then selling the stocks, and returning the proceeds of the sale to the SlamBang Corp?  (Less, of course, the fees, commissions, etc. for the bank)  Would this be a violation of the Volcker Rule?

Now we’ve waded into the edges of the Liquidity Swamp, liquidity being “The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.”   And, our next step takes us into “leverage.”

Leverage means the extent to which a company is operating on borrowed money.   The good news is that if the company isn’t too far in debt it will be financially stable and lenders will want to make loans to it for a variety of very legitimate purposes.  The bad news is that if it’s as underwater as a Sand State homeowner with a NINJA loan it will be bankrupt, and no one will want to lend the corporation another nickel.  (Think Lehman Brothers)

Life can get messy if and when the SlamBang Corp. gets its revenue from making something tangible AND from making speculative bets in the equities markets — with borrowed money (like asking the bank to hold on to the “stuff” it bought until the price goes up.)  The more the SlamBang Corp. is leveraged — borrowing money to make money — the riskier the entire proposition.  Where will our SlamBang Corp. go to borrow more money to make more money?

Bankers, having set up sizable trading desks, or having once been one big trading desk (Goldman Sachs), were only too happy to transform themselves into bank holding companies for the benefit of their very own social safety net (FDIC coverage, Fed Discount Window, etc.) when they were collapsing like Macy’s Thanksgiving Day Parade balloons in a shooting gallery — now that they have returned to profitability they aren’t the least bit interested in returning to “core banking activities,” and divesting themselves of the revenue generating proprietary trading functions.

Re-enter the financial officers of the SlamBang Corp.  into the lobby of the Big Bank.  Under the terms of the Volcker Rule the Big Bank may not act BOTH as their adviser AND their creditor.  What Big Bank fears at this point is that SlamBang Inc. will take its “speculation in liquid assets for the purpose of leveraging its position” elsewhere, to a private equity or hedge fund for example.

It’s important to notice at this point that SlamBang Corp. isn’t hurt by the Rule, it can easily send its business to an alternative source of credit or financial services — it’s the Big Bank that wants a fork in every plate on the table.    Advocates of Big Bank say:

“The situation becomes even more confused if the bank serves as a “market maker” for a security. A market maker plays a vital role in ensuring the efficient running of financial markets by both buying and selling that security so that others can be assured of buying and selling opportunities, an activity that requires the bank to own a certain inventory of the security.” [Heritage]

Translation:   Banks are now market-makers and market-makers have to own securities in order to be market-makers.   The problem for our economic system is that when the “markets” are made by the banks, and those “markets” are extraordinarily speculative, AND the Big Banks expect the FDIC or the Fed to rescue them if the speculation goes south — then how best can we sustain the traditional functions of our financial sector in a capitalist system without allowing the Big Banks to put us all in jeopardy?

The Volcker Rule.

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