The so-called Volcker Rule, which prohibits banks from using their capital to speculate in commodities and stock markets, is under attack by — who else — the largest Wall Street banks. Liberals in Congress want it passed. The big banks don’t.
The banking system has resisted making loans at all. Excess reserves held at the Federal Reserve are in the $1.6 trillion range. The result has been slow economic recovery but also very low price inflation.
The Volcker rule would force the big banks to start making their money by making conventional loans to businesses. But there is not much profit in this when compared to speculative investing, or so the biggest banks think. So, they resist government interference with their practices.
We read in the New York Times:
Regulators in charge of writing the Volcker Rule, which would ban banks from trading with their own money, were inundated with complaints and suggestions on Monday, the deadline to comment on a draft proposal. More than 200 letters were expected to be filed by the midnight deadline on the rule, which regulators outlined in October.
Commenters included the rule’s namesake, Paul A. Volcker, the former Federal Reserve chairman, who submitted a strongly worded defense of the rule’s intent in a letter on Monday. Others, like consumer advocates and lawmakers, criticized the draft rule for not being tough enough.
“This will make the overall economy less stable and less conducive to growth,” David Hirschmann, head of the Center for Capital Markets Competitiveness at the Chamber of Commerce, said in a letter. . . .
Wall Street firms, lawyers and trade groups churned out many Volcker Rule appeals. The Securities Industry and Financial Markets Association, or Sifma, hired the law firm Davis Polk to write multiple pitches to regulators. A hodgepodge of Wall Street trade groups led by Sifma alone filed five comment letters on Monday, including one document that spanned 173 pages. A regulatory comment letter normally runs 10 to 20 pages. During the writing period, most big banks formed internal Volcker Rule “task forces,” often led by risk officers and lawyers, to coordinate the effort across trading desks and divisions, people briefed on the efforts said.
This tells me that the practice of using bank capital to invest in these markets is where the profits are. The banks don’t want this profit source removed.
Wall Street’s biggest banks even submitted their own comment letters, taking an unusually aggressive stance that underscored the importance of the issue. Ordinarily, banks prefer to have trade groups and lobbyists do the talking for them.
But with profits — and the future model of the industry — at stake, Goldman Sachs, Morgan Stanley and Citigroup each submitted a comment letter, people briefed on the matter said. The letters were not yet public, but they were expected to be filed before the midnight deadline.
The draft rule is 300 pages long. It could take five months to complete the draft.
Wall Street wants to delay the rule until after the 2012 elections.