If you needed to appeal to one authority on banking regulation, you could do worse than to consult Sheila Bair, the former chairwoman of the FDIC. And now she’s advocating scrapping the Volcker rule and starting over. She comes at this by looking at the spectacle of MF Global – a brokerage house that would not be covered under the Volcker rule – and asking whether they would be permitted to trade depositor funds on their own account if they were a bank. The answer is far less clear-cut than it should be – and that’s the problem with how the Volcker rule emerged from the sausage grinder of the regulatory apparatus.
MF Global took proprietary positions in European sovereign debt through what Wall Street calls “repo to maturity” transactions. It technically sold the European bonds to other firms, agreeing to repurchase them at a premium when they matured in 2012. MF hoped to make money by pocketing the difference in the rate it paid its trading partners and the higher rate paid on the bonds themselves. As market prices on the bonds fell, MF Global’s trading partners demanded more collateral. Given MF’s extreme leverage — about 40 to 1 — the collateral calls quickly brought it down [...]
Under the 300-page Rube Goldberg contraption of a regulation recently proposed by federal agencies to implement the Volcker Rule, “repo” transactions like MF Global’s are not generally treated as verboten proprietary trades. Thus, even if MF Global had been a bank, it arguably could have used this exception to gamble away, putting the FDIC at risk. Indeed, the proposed rule has so many loopholes that seem to permit proprietary trading with government-insured deposits that former MF Global CEO Jon Corzine might consider commercial banking for his next career move.
Bair sympathizes with regulators trying to draw a very difficult line on proprietary trading. But she says that the drawing of that line is the entire problem with the rule. Too many exemptions and allowances for market-making have turned the Volcker rule to mush, and in Bair’s opinion, it’s become impossible to salvage.
So here is an idea. Regulators should scrap the mind-boggling complexity in the proposed rule and focus instead on the underlying economics of a transaction. If the transaction makes money the old-fashioned way — the customer paying the institution for a service through interest, fees, and commissions — then it passes the test. If profitability (or loss) is driven by the direction of markets, then it fails. Inevitable gray areas, such as market-making, need to be done outside of the insured bank and be supported by a truckload of capital. Securities firms should be allowed to maintain adequate inventory to make liquid markets.
Most important, regulators should tell executives and boards that they will be held personally accountable for monitoring and compliance. Bank leadership must make clear to employees that they are supposed to make money by offering good customer service, not by speculating with the firm’s funds.
I think the response to this is that we don’t just need new rules but new regulators. The Volcker rule embedded in Dodd-Frank, which generally came out of the Merkley-Levin amendment, had far more bright lines than the draft version released by the regulators. Congress did their job, not perfectly, but in enough of a way to spook a lot of big players out of the prop trading market. The regulators, influenced by Wall Street, destroyed the Volcker rule. So a new rule based on the underlying economics only works if you have diligent regulators – thousands of clones of Bair, essentially – setting the rules of the game and engaging in vigorous enforcement. Otherwise, the whole thing falls apart.
Bair says that if the regulators cannot structure a simpler Volcker rule, maybe Glass-Steagall (32 pages of simplicity) needs to be reinstated. Certainly. The more clarity, the better.





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Thanks, David, for highlighting this. I always felt better knowing Sheila Bair was there.
Maybe Romney will make her Secretary of the Treasury.
Simplest way to regulate anything is through the tax code.
Put a stiff tax on any activity and you get less of it.
As usual, a great underreported story.
Thanks
No shit, Sheila.
The Glass-Steagall Act I’m familiar was not even a page long.
I’m sure you’ve seen, but obviously EconContempt disagrees with you, and has called the Volcker Rule that came out of the bill as one of the worst aspects of it given how weak it was (and he thought WS lawyers would easily be able to navigate it from the get-go). Not sure I agree with you, David. I think it was shit from the get-go.
Why would anyone trust her more than any other whose entire career was owed to the political? She made a big deal at the fdic for how it managed its way thru the ’08 crisis. Guess what? Her way was only possible because of the FED enormous gimmeees to the banks. I certainly don’t trust her.
this was absolutely predictable. What a waste of time, like so many Congressional actions lately. Glass-Steagal worked for 40 years. Bair is probably right to recommend it again, but it’s waaaay to simple for Congress if it’s under 800 pages. I think the next thing to occupy is our most dysfunctional institution — Congress.
Yep, and everyone else that isn’t on broad need to be taken out in the street and have their throats slit on placed in the gutter. It’s amizing no one goes to jail on ws but they have no problem with OWS. How sad, as am old I’m glad I won’t have to watch the fall of Amerika the country my Father served in ww2 and korea. Good luck and how sad that this what the great nation has come down to.
Even Volcker thinks the Volcker Rule is junk. Thank O for this bullshit.
Scrap Bair~ it’s time to reinstate Glass Steagall. Look no further than HR 1489 which is sitting in the House of Reps. THE RETURN TO PRUDENT BANKING ACT introduced by Marcy Kaptor D Ohio which will do just that.
Once that is done, then we should pass the NEED ACT OF 2011
Volcher was just fine until President Barack Obama defanged him.
Time to oust President Obama and get some sanity up in the WH.
Bair is just waffling. Marcy Kaptor D Ohio has got it ready to go: HF 1489 THE RETURN TO PRUDENT BANKING ACT sitting in the House waiting for Speaker Boehner to remember what time of day it is. About one second to midnight, with President Obama doing everything he knows how how to trigger World War Three. Hillary Clinton is on the carpet because she was meant to REALLY rock the Russian Elections boat, but since she spent years getting the Reset Button working, her heart wasn’t in doing the bidding of Gorbechov, Susan Rice and President Obama. No wander she looks so frazzled all the time. What was she thinking when she said she would work with these creeps. Remember, the serpent was told that he would have to crawl around on his belly, that’s creeping. Get it?
Knowing she was where? Out to lunch? We would all be better off with HR 1489 passed already, THE RETURN TO PRUDENT BANKING ACT introduced by Marcy Kaptor D Ohio. Denis Kucinich has gotten the NEED ACT OF 2011 ready to put into action once Glass Steagall RTPB Act has gotten reinstated. Congress could start uttering credit for real projects like constructing things that will last and provide a platform for mankind to continue to exist upon. Self destructing the human race by carrying on with the oligarchs and their drive for World War Three to erase their competition isn’t sane. We have a really incompetant Administration and all we are told are half truths. Fast and Furious for example. MF for example.
What will Ms. Bair say about that. Mr Corzine had such “good intentions:
Eric Holder never”intended” to misspeak.
What did they intend? How about asking them that question?
Sheila Bair’s main purpose is to change the subject from FRAUD. Corzine and the shadow banking system committed massive fraud on the order of 1.2 billion dollars. Anybody who has studied the commodities market knows full well the enormous amount of manipulation that goes with dark pools and with rehypothecation. BUT, what happened with MFGlobal was even worse. They just stole the money out of people’s accounts. What is happening now is a massive attempt to change the subject. That nobody has been arrested is the clearest possible sign that the level of corruption is nearly 100%. Given the interlocking circle jerk of 700 fucking trillion dollar derivatives, you couldn’t even impose Glass Steagall without blowing the house down. UNDERSTAND: This is all DIVERSION from the MASSIVE FRAUD. That is Bair’s real purpose. No regulation would matter in the case of MF Global. THEY STOLE THE FUCKING MONEY OUTRIGHT. Don’t fall for the diversion.
http://jessescrossroadscafe.blogspot.com/2011/12/mf-global-issue-is-fraud-and-attempt-to.html
It is too little, too late. Obama could have appointed Sheila Bear or somebody of her regulatory ilk to be Secretary of the Treasury, OMB director, or even chairman of the Fed when he was first elected.
He didn’t. Instead, we got Goldman-Sachs, Goldman-Sachs, and Bernanke(continued). He showed his true corporate colors then.
There will be no effective reform of investment banks under either major political party. The D’s and R’s are, after all, investments themselves.
TRIPLE SPACED IN 36 PT FONT so it can be seen, it should run 22 pages.
MF Global was not an investment bank. It was a futures broker. These were customer accounts that were raided. Lots and lots of farmers cannot buy seed now because their accounts have been frozen and or emptied. The media is not covering the story and when they do, they are playing on the fact that most Americans do not make use of futures accounts, and trying to confuse people into thinking that these were just risky bets by Corzine. This was fraud. Corzine took the money out of people’s accounts and passed it onto the UK where JPMorgan and others took the money. This was fraud. Most Americans, and evidently most people on this blog, do not understand the quantity or the quality of the fraud now. But when the Germans say enough is enough, and the sovereign debts are written off, and the CDS’s become due, and the 700trillion dollar derivatives circle jerk comes to an crash, and folks find that the money in their 401k accounts is GONE, then they will understand. There is no government insurance for 401k accounts. The same thing can happen to them. Your retirement money will be siphoned off through the CITY OF LONDON eventually. If you are lucky, you’ll get back 69% as the MFGlobal customers look to get. Ignore the MF Global story at your own peril.
makes sense to me.
Agree, the big turd being polished here is the fraud committed when the customer’s accounts were apparently used to cover the company’s margin calls.
Anybody who thinks this cannot happen at investment banks or TBTF banks like BoA which also has an investment bank is being naive,
There are very real and compelling reasons to move your money and this is one of them.
Wouldn’t it just be much less hassle to re-instate Glass-Steagall?
She is one of the forgotten heroes in Ron Suskind’s Confidence Men book
Read Matt Taibbi’ Rolling Stone article about how everything useful was gutted out of Dodd Frank that Obummer made such a big deal over