Whither the Volcker rule? After a flurry of discussion about it in the wake of JPMorgan Chase’s Fail Whale trades, we’ve heard significantly less of late. In fact, regulators blew through a July deadline on finalizing the Volcker rule. The last word we had was that the deadline was pushed back to the end of the year.
More time means more opportunity for big banks to lobby over various exemptions. And that’s just what they’re doing, attempting to take a little loophole they found in the initial language and blow it wide open.
Banks are urging U.S. authorities to broaden a little-noticed exemption in the Volcker rule’s trading curb that critics say could blind regulators to the next version of the JPMorgan Chase & Co Whale trade [...]
The exemption covers a special type of account, designed to prevent the kind of cash crunches that took down Bear Stearns and Lehman Brothers in the heat of the 2007-2009 financial crisis.
Banks want an even broader exemption. But critics say the proposed rule, as is, already excludes liquidity trades almost entirely from the Volcker rule, expected to be finalized later this year.
As is, the liquidity exemption “deeply undermines the applicability of the Volcker firewall,” Democratic Senator Jeff Merkley, one of the authors of the Dodd-Frank provision authorizing the rule, said in an interview.
Merkley believes that banks could use this exemption to hide bets like the ones in the Fail Whale trade. Of course, the banks are saying they must broaden this exemption or their banks will fail entirely.
It looks to me like banks want to preserve the ability to use these liquidity accounts to make proprietary trades. This way, they could ensure a highly liquid menu of assets and securities and turn them over in case of a cash crunch. But this exempt account could be so easily gamed, and would almost certainly get used as a profit center instead of a means for liquidity management (usually this is done by lowering the maturities on a basket of securities, so they can be exited more quickly). This idea that you can’t have a liquid portfolio unless you make risky proprietary trades is really nonsensical.
Hilariously, JPMorgan Chase is the major bank pushing for this. In fact, Ira Drew, who used to head the infamous Chief Investment Office that put together the Fail Whale trades, met with regulators to lobby for this exemption in February, before the trades came to light.
The banks basically want to find an account that they can use for the purposes of casino playing, and will make up any excuse – hedging! market-making! liquidity management! – to get that account legalized. Considering that the regulators continue to back off actually writing the rules here, it’s likely the banks will be successful.




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It’s revealing to hear Cold War military jargon from a Kissinger acolyte in the realm of banking practices, eh?
Fuck what the banks want and Paulsen and Geithner, the two Republican Secretaries of Treasury the banks rode in on.
Seems to me, small investment potatoes that I am, liquidity and proprietary trading are antithetical. Yes? I mean, liquidity is cash or cash equivalents, last time I checked with a prudent adviser. Proprietary portfolios might contain, literally, anything. Shares in Venus building lots, options on Libyan long bonds, etc.
I don’t know why the banksters want another account to conceal risky trades. I think those trades are well concealed from the banksters & everyone else in the accounts that already exist.
Fer cryin’ out loud, Corzine couldn’t find $1.2 billion.
You know, I can’t figure out if Corzine was flat out lying or flat out stupid, but I’m leaning to both. Lying and stupid are not mutually exclusive. He does know how to spread his cash around to good personal effect, tho.
When he was NJ gov and somewhat after the economy imploded, his staff tried to spin that Corzine had seen it coming and positioned the state to lessen the damage. BULLSHIT.
Scott Horton sez “empire makes you stupid.”
Much as I dislike Corzine, I don’t know that he’s a supporter of the empire. Given his very liberal voting record as senator and his term as governor, I’d say Not. The man’s known positions align very closely with my own and I’m way left. I just never trusted him and I voted for Bob Franks when Corzine ran for senator. Corzine’s one of those conceited horse’s asses who takes the position that if you disagree with him, he’s right, you’re wrong, end of discussion. Obama is another. It’s a mental disorder not yet recognized in the Diagnostic and Statistical Manual of Mental Disorders. Some of us are on to them, tho.
D-Day may have already covered this, or something similar, in one of his previous articles, but I was wondering if this “trading around order flow” could be the loophole in the Volcker Rule that Dimon had eluded to 3 or 4 months ago. Just curious.