I’ve been pretty skeptical of the whole Volcker Rule thing because I don’t really understand the conceptual division between “making bets with your own money” and “market making,” and I’ve been gratified to see that paid financial industry mouthpieces are on the same page. Now it’s nice to see unpaid mouthpieces agreeing too:

Yet finance ministers from around the world lined up to whisper in the ear of Timothy Geithner, the Treasury secretary, who made the rounds in Davos on Thursday and Friday, about a specific element of the Volcker Rule that has them apoplectic: The rule says that United States banks — and possibly certain foreign banks that do business in America — would be restricted in trading foreign government bonds. Yet the rule, conveniently, provides an exemption for United States government securities. Every other country is out of luck.

The measure, critics say, is likely to increase borrowing costs for foreign governments, reduce liquidity and make the market for foreign government bonds more volatile, the opponents charge. In the end, it may fall into the category of unintended consequences of a proposed new regulation.

So, yeah, totes agreed, but for diversity here is a more measured view:

The Volcker rule is, in many ways, a riddle wrapped in a mystery. It is impossible to know what the impact on market liquidity will be. Foreign banks, or non-banks, may step into the fray to pick up the slack… or perhaps the impact of the rule won’t be that big on US banks, anyway. Without a set of final rules, a period of time to watch them in action, and a parallel universe to see what would have happened if they hadn’t been implemented, it’s all speculation.

Again, I come down on the side of robust market-making by banks being a good thing and so I suspect those lined-up-and-whispering finance ministers are right, but it’s also true that that’s just, like, my opinion, man, and nobody really knows what will happen but if I were Citadel I’d be lobbying like crazy for the Volcker Rule and promising European governments that I’d make awesome tight markets in their bonds.

But if I were a US bank I’d be doing something different. Specifically, I’d be doing what I’d bet they’re doing, from this article. When you work in a pariah industry like investment banking, indirect lobbying looks far better than direct lobbying. So when Jamie Dimon gets on a public investor call and says “the Volcker Rule will destroy liquidity and capital raising and all human society,” everyone’s all, oh Jamie, you and your fuming, how cute. But when he calls a client and says “the Volcker Rule will destroy our ability to make markets in your bonds,” the client listens. The trick is to convince sympathetic and important clients that a restriction on banks will destroy their ability to fund themselves. Then those sympathetic and important clients go and lobby and get press coverage that is significantly friendlier than “banker wants unrestricted banking.”

Now, despite the focus of the Dealbook article, this has almost nothing to do with foreign government bonds. Right now the Volcker Rule makes it difficult to make markets in basically any financial asset, with some exceptions like spot currencies and US government bonds. The name of the game for banks appears to be to expand those exceptions so they can do more unrestricted market making / “prop” trading. So you start with the most sympathetic and important clients, who are – well, I might not have guessed “foreign financial ministers,” but whatever, I mean, Canada, they’re pretty nice. Certainly the systemic risks of making it difficult for foreign governments to fund their debt seem to be on everyone’s radar these days. So maybe you succeed in getting foreign government bonds added to the list of exceptions.

But once you’ve done that, you’ve accomplished most of your goal. Because you’ve gotten the regulators to accept that the Volcker Rule restrictions will in fact dry up liquidity and make capital raising harder – a pretty plausible proposition, but also a debatable one and one that the regulators are pushing back against so far. But if they accept it in connection with foreign government bonds, then the next step is to ask: why make capital raising easy for foreign governments but not domestic debt issuers? Domestic equity issuers? Domestic interest-rate-product-buyers? There’s some sliding scale of asset safety, where you might be less fussed about banks using their own money to run books in safe assets (UK government bonds) than in less safe ones (equities or horrible derivatives) – but the most recent blow-up was on European government bonds, so that argument doesn’t really fly.

If the foreign finance ministers’ lobbying works, then the next step is for banks to go to their big all-American household-name U.S. non-financial clients and suggest that it might be in their best interests to approach Tim Geithner and say “wait, you’ve carved out an exception to help the French raise money, but not to help us do the same? WTF?” And that’s probably the best chance the banks have to get the Volcker Rule rolled back a bit.

Volcker Rule Stirs Up Opposition Overseas [DealBook]

The Volcker Rule riddle [FTAV]