Wednesday, December 11, 2013


It's not that I don't understand it…well, there are parts that I don't…but that I, and I suspect a lot of people, are going to have quite a time explaining what you can do and what you can't.  You see, the thing was written by regulators  who know what they were writing about but with the expectation that those who will be doing the oversight and enforcement now and years from now will have the same degree of understanding and concern of what brought all this about.

To begin, one should understand I think that the law is not an attempt to cure the ills of the system that led to the crisis of 2007.  Nothing covered in the law deals with the causes of the crises…some of the results to be sure, but not the causes.  Rather than attacking the causes of  the financial bubble the Volcker Rule is a successful effort at "getting even:" with the industry in general through the happy circumstance of just when things seemed to be settling down, J.P. Morgan road to the rescue with its awful handling of the "London Whale."  It is a politician's dream; a true "gotcha " moment.

You might be surprised to learn that I don't have much of a problem with that.  The relationship between politicians, practitioners and regulators has always been a bit of  dance macabre but for the most part the steps made by all parties were understood.  Understand with what you are dealing and you survive, but think for a moment that you can place yourself above the twirling and whirling and you get in trouble immediately.  This law is the result of the industry and one member in particular of making that error.

Now at this moment in time we all understand what transpired to make this event come about and this perspective will influence, as it should, those charged with the responsibility of enforcing its provisions.  We know what we don't want to happen again and will rule accordingly.  But 20 years from now when the law will still be in place but the institutional and historical perspective will be lost.  Reliance upon the simple language (not so simple) which for the most part is entirely subjective in an attempt to make objective decisions will become increasingly difficult in years to come.  As of today many provisions that are to be enforced defy definition.  What, for example, is "market making" as opposed to "positioning"  for one's own account?"  Is it size?  Is it duration? Is it type of instrument?  Why are Government Securities exempt from any consideration?    What new financial instruments may come about that must be encompassed by this rule?  

In the end, a lot of the people involved in this effort surely felt that the business of banking should be little more than the taking of deposits and the making of loans with hopefully the rate differential being enough to pay expenses in order to make a small profit with very little risk.  A noble endeavor but a naive one I'm afraid.  We need risk takers in this innovative world in which we find ourselves just as politicians need liquidity in government bond markets, hence the exemption.  But is that to say there is no risk in government lending?  Ha! A fool's option.

I have no theoretical problem with something like the Volcker Rule; I simply find it stupid.  It's subjectivity requires very human decisions and those decisions require far greater understanding of what risk is and far better enforcers of intelligent aversion to unsupportable risk taking in all institutions that we have at the present.  20 years from now the problem will remain but with another generation lacking in experience and institutional knowledge of what came before charged with managing what swirls about them.  For the short term I think we will see a decline in risk taking which will have the effect of lower level of economic activity and a lower job level.  In short the Volcker Rule will be proclaimed a success.  Of course we may well see a steady movement of some of the brightest among us to truly private institutions where regulation is far less invasive resulting, in part, to an even greater concentration of wealth in fewer hands.   And we will still be asking the same question: what constitutes market making?  And I still will not be able to give you a definition.


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