You could, if you wanted to, divide the world into people who find parsing through the Volcker Rule draft creepily fascinating, and people who would rather not, thanks for offering. The first category, as far as I can tell, consists of (1) me, in small doses, and (2) a PowerPoint-enabled band of lawyers at Davis Polk, who helpfully put together an insane flowchart of the Volcker Rule. The latter category is everyone else.
So if you were, say, David Viniar, and you clicked on Davis Polk’s flowchart and noticed that it had nineteen slides many of which look like this:
… you might say “fuck it, there has to be an easier way.” Fortunately, there is, and it’s right there on Step 1: if you’re not an insured depositary institution (or bank holding company or affiliate), you’re not subject to the rules and you can go merrily on your prop trading way.
True? Somebody thinks so:
Goldman Sachs Group Inc. (GS) and Morgan Stanley may consider dropping their status as bank holding companies to avoid expenses tied to the Volcker rule, said David Hilder, an analyst at Susquehanna Financial Group LLP. …
“The regulators have proposed a massive new compliance burden on banks to prove that their market-making activities are just that, and not proprietary trading in disguise,” wrote Hilder, who’s based in New York. “If these regulations are adopted in anything close to their proposed form, there will be large additional costs imposed on banks as market-makers that will not apply to market-makers not owned by banks.”
Others are skeptical:
“If they tried to do that, Congress would amend the rule to say systemically important banks rather than bank holding companies,” [KBW analyst David] Konrad said in a phone interview. “This is part protecting deposits, but also part too-big-to-fail. I don’t think there’s any interest from the investment banks in doing that, and I don’t think it would serve that purpose.”
Other arguments against letting GS and MS escape Volcker's clutches include the fact that big broker-dealers are generally viewed as getting shadow support from the government, and also, people just kind of hate the shit out of Goldman and don't want anything good to happen to them ever. (Morgan Stanley could be good to go.)
And Congress probably wouldn't even have to amend the rule. Dodd-Frank's "Hotel California" provision provides that a big bank that gives up its bank status automatically remains a "systemically important nonbank," subject to similar regulation that is largely left to the discretion of the regulators. The Volcker Rule doesn't currently seem to apply to systemically important nonbanks, but you can bet that it would if GS and MS tried to wriggle out.
That said, if you think, as I am inclined to, that market making in financial assets serves some useful social purpose and will continue to attract clients and money, then someone will provide it. Hilder at Susquehanna is probably right that the costs imposed on bank market-makers will be huge, and he’s probably wrong that Goldman and Morgan Stanley can easily opt out of those costs just by dropping BHC status. Which could leave an attractive opening for the nonbank market makers of the world, whether in the form of Jefferies, or Citadel, or a merry brotherhood of robots. Or Susquehanna.