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“The lady doth protest too much, methinks…” – Volcker Must Be On To Something

Posted in Banks and Financial Services

Big opportunities for big paydays kept big shot bankers from taking big chances at the peril of Main Street.  And ultimately it created a big problem… Glass-Steagall helped solve that problem.

Hell hath no fury like a bank on the brink.  Monday’s midnight deadline saw the major banks, bank lobbyists, and interested parties submit over 150,000 words in protest of the Volcker Rule.  The SEC will now wade through the comments, over 75 of which were received on the deadline yesterday.

“The lady doth protest too much, methinks.”  Wall Street’s vehement opposition to the Volcker Rule points to what we have known for centuries—indeed, since Shakespeare’s time—that perhaps where such opposition exists, there is a real issue at stake.  The ballplayer who most fervently opposes steroid testing is likely a cheat.  Similarly, the outrage of just about every big-name bank in the United States indicates that Mr. Volcker is indeed onto something powerful.

JPMorgan, Wells Fargo, Deutsche Bank, MetLife, and Citigroup (heard of ‘em?) all submitted letters in protest of the rule, claiming their assets were on the line.  Surprised big banks oppose a policy that would limit their risky gambling?  Goldman alone met with the Securities Exchange Commission six times within three months to discuss its opposition to the rule.  Six times in three months!  When I retire, I’d be happy just to get to the golf course that often.

But six times Goldman’s Finest had a captive ear at the Commission.  Repeatedly, they requested comprehensive redrafting of Dodd-Frank and the Volcker Rule.  The most common complaint: the proposed ban on proprietary trading will reduce “liquidity”—or the free flow of cash—as banks pull out of the market.  The U.S. Chamber of Commerce wrote, “In short, the American engine of economic growth will be deprived of the fuel needed to operate.”  Sounds like Doomsday.

Listen, folks: Paul Volcker knows his stuff and is trying to give us all a history lesson.  After the Great Depression, the Glass-Steagall Act was enacted to regulate banks and shield Main Street from a dangerous scenario: banks both held depositors’ money and had a major incentive to risk it.  Big opportunities for big paydays kept big shot bankers from taking big chances at the peril of Main Street.  And ultimately it created a big problem.  Glass-Steagall helped solve that problem by separating risky investment banking from deposit-based commercial lending.

After a few decades of peace and quiet, commercial banks decided they wanted in on the action and success of investment banks, which were making money hand-over-fist in the 80’s and 90’s.  So commercial banks began to lobby for deregulation, and in 1999 the effort paid off.  Glass-Steagall was largely repealed, commercial banks and investment banks re-merged, and the industry became the same free-for-all mess it had been (only with a century of technological advancement behind it to make it all the more complex).  Hence TARP; hence the Big Short; hence the last five years of chasing our tails trying to figure out how we got into this mess in the first place.

What’s the lesson here? Commercial banks don’t belong in the markets.  Their role as simple depositories and basic lenders should become sacrosanct once again, separated from the entities that engage in risky investments.  It will be okay, big guys.  Investment banks will allow for the liquidity you supposedly so dearly fear losing.  The market will adapt and the reduced risk in the U.S. financial system will restore confidence and integrity to the markets.  The economy grew for decades under the Glass-Steagall Act.  Would we really be upset to see that growth again—growth all can benefit from, not just traders?

 

Some examples of the comments submitted to the SEC, from the Wall Street Journal:

  1. MetLife’s letter says the firm has $457 billion in assets under management tied to the insurance operations and they are afraid of liquidity drying up.  MetLife says it is concerned companies looking to issue debt will find it more expensive and that investors that buy debt—like MetLife—will lead to an “almost instantaneous decline” in the value of the insurer’s investments.
  2. The head of Citigroup’s broker-dealer group submitted a 19-page comment that argues municipal securities would be impacted most by the rule, looking for more specific final rule in regards to municipal securities.  The letter says Citi believes the market-making activities of the big banks is central to the trading operations of the securities sold by states, cities and local governments, and that the language of the rule doesn’t properly exempt those securities.
  3. Meanwhile, Wedbush, the brokerage and financial group, writes in its letter that it is concerned about how the rule will define and exempt non-bank affiliates of deposit-taking groups from the rule.  The firm’s President, Eric Wedbush, writes the Fed is applying an overly broad definition of a banking entity, which will impact numerous entities that “in no way put in jeopardy depositors’ accounts and would not in any event be backstopped by depository insurance provided by taxpayers.”
  4. JPMorganChase & Co. said the proposed rule “appears to take the view that banking entities, their customers, and the economy must pay almost any price in order to ensure absolute certainty that there can never be an instance of prohibited proprietary trading.”  A 67-page letter it submitted looked at how some aspects of the new regime could “chill legitimate market making and impose needless costs.”

 

Assisted by Arezu Hadjialiloo