Volcker On The Volcker Rule

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The Volck-Man, who will testify later today before the Senate Banking Committee on his prop trading rule, would first and foremost like everyone to understand that the rule is part of a broader structural reform, which he summarizes elegantly this way: The idea is that a designated agency be provided authority to intervene and take control of a major financial institution on the brink of failure. The mandate is to arrange an orderly liquidation or merger. In other words, euthanasia not a rescue.

And second, Volcker is warning bankers that they won't be able to find some loophole by being creative and redefining what "prop trading" entails 'cause "every banker I speak with knows very well what "proprietary trading" means and implies. My understanding is that only a handful of large commercial banks - maybe four or five in the United States and perhaps a couple of dozen worldwide - are now engaged in this activity in volume." So you know who you are and you're not in the circle of trust.

Second, the functional definition of hedge funds and private equity funds that commercial banks would be forbidden to own or sponsor is not difficult. As with any new regulatory approach, authority provided to the appropriate supervisory agency should be carefully specified. It also needs to be broad enough to encompass efforts sure to come to circumvent the intent of the law. We do not need or want a new breed of bank-based funds that in all but name would function as hedge or equity funds.


The Volcker Rule Will Come Too Late For Kaufman Bros.

If you're a more or less regular consumer of efficient markets hypothesis Kool-Aid then a fun activity is to handicap the probability of various public policy things based on market reaction.* So for instance Obama's budget is going to reduce the tax deductibility of munis! And the muni market didn't care! So, no, Obama is not going to reduce the tax deductibility of munis. You heard it here first, or last, or whatever. (Exercise for the reader: is Obama going to raise the tax rate on dividends?) Since today seems to be Volcker Day hangover it's worth pondering this: