The Blog

Bernie Madoff Is Jamie Dimon's Latest Headache

9:30 AM, Jan 11, 2014 • By IRWIN M. STELZER
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

Some hope that adding the Volcker Rule to the post-crisis reforms will do the trick—sharply reduce, if not eliminate, the threat to the system inherent in the presence of huge banking institutions. That rule is aimed at preventing banks from risking taxpayer-insured deposits by “proprietary trading,” buying financial instruments for the bank’s own account, rather than to serve clients. Never mind that no less an expert than incoming Federal Reserve Board chairman Janet Yellen says that there is “an absence of a lot of bright-line distinctions” between these two types of transactions.

The rule will affect some markets, that for municipal bonds among them, but not others. Goldman Sachs will take a 20 percent equity stake in a $2 billion property fund despite the Volcker rule’s prohibition against banks owning more than 3 percent of a hedge fund or private-equity portfolio because property investments are excluded from the rules’ restrictions. Some denizen of K Street has undoubtedly earned a “lobbyist of the year” award.

The 37-word original version of the Volcker Rule, contained in the Dodd-Frank law, has grown into 963 pages containing 2,826 footnotes, to be enforced by five separate regulatory agencies that agreed on a final draft only after pressure from the White House and Treasury to end a three-year squabble over the rule’s details. Now, several of the gang of five are claiming the role of prime regulator of various aspects of the banks’ activities.

Some wags are dubbing the Volcker Rule “The Lawyers’ Relief Act.” The Wall Street Journal asked a senior partner at Davis Polk & Wardwell LLP if the rule had created “a cottage industry” for lawyers, and was treated to the candid reply, “It’s an awfully big cottage.” More like a mansion.

Admittedly unmanageable, too big to damage with fines, too complicated to regulate, the big banks can be made smaller with no so-far proven loss in efficiency. Until that far-off day, we will have to make do with higher capital requirements and tighter regulation. Better than nothing, and far better than the pre-crisis situation.

Recent Blog Posts