Sometimes, I have to remind myself that the Volcker Rule has nothing to do with Warren Buffet’s secretary’s salary. It’s harder to remember that it isn’t actually a rule until it has been written. Calling it a rule at this point is a bit confusing, since it is still in draft form, and still the object of intense lobbying by the Wall Street Banks that don’t want to give up their place at the Craps Table.
Meanwhile, the president has thrown things into confusion by nominating the relatively unknown Timothy Massad to head the Commodity Futures Trading Commission (CFTC). If confirmed, he would replace former Goldman Sachs executive Gary Gensler, who has ironically been one of the tougher regulating voices in Volcker Rule drafting process.
As the president’s pick to head the CFTC, Massad would be handed a massively expanded portfolio. The small agency – complete with a small budget – is tasked with overseeing a complex derivatives marketplace that runs in the hundreds of trillions of dollars.
He has earned plaudits for his work at the Treasury Department, where he steered the reviled Troubled Asset Relief Program towards a government profit. Massad’s backers point to his earlier work as a corporate finance attorney as proof he has the experience to police derivatives.
Since the big players don’t know where Mr. Massad stands on regulation, they don’t whether or how to oppose his nomination. That’s a shrewd move by the president. It’s also a reminder that all the bitching about the Troubled Assets Relief Program was overblown. It was a morally dubious program, but it wasn’t the financial sinkhole people predicted.
The Treasury Department is hoping to announce the Volcker Rule before the end of the year. We’ll see if it emerges with any of its original teeth.
It is helpful to be reminded that the Volcker rule intends to prevent investment banks and other non-commercial financial institutions from using the customer’s money to trade high-risk securities on the financial institution’s own account. It seeks to force the institutions to use their own retained earnings on these high-risk trades.
The commodities markets, regulated by the CFTC, are only one piece of the overall derivatives market. But by being the more volatile, and based on recent scandals the most subject to manipulation by players, they are also the most risky basis for derivative trades.
What the mortgage derivative meltdown showed was that derivatives increase risk of loss instead of spreading risk of the underlying basis. And that goes to the nature of derivative and swap markets that allow traders without direct financial interests and consequences to place bets in the casino. And the transnational treatment of derivatives by financial corporations as a license to counterfeit money, or at least huge (isn’t $100 trillion in exposure huge?) potential obligations and have a paper asset bubble.
The Scott Brown amendment to the Dodd-Frank bill by allowing hedge fund trading violates the Volcker rule from the outset. It’s not clear what regulators can do to offset that POS.
As long as Congress is in the financial industry’s pocket all of the regulators are on a pretty short leash.
Re-instate Glass-Steagal. I suppose that’s too simple for politicians.
Far too simple if they want corporate welfare for politician … er I mean campaign donations.