And Now A Clever Bit Of Volcker Rule Lobbying

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You can - but shouldn't - read some overheated complaints about how bankster lobbying weakened the Volcker Rule from I guess its platonic form of "anyone who does anything that, in hindsight, looks sort of like prop trading, will be shot."* One problem with that is that it rests on a somewhat crude theory of lobbying, as just going to a regulator and saying "I want you to do X because it is good for banks and look I am holding a bag with a $ sign on it how about that." In fact though effective lobbying by a bank involves (1) good arguments, and (2) because everyone just hates banks, reiteration of those arguments by sympathetic non-bank supporters.

This Bloomberg article is probably my favorite Volcker Rule story yet:

U.S. banks pushed regulators to widen proposed restrictions on trading and hedge-fund ownership by foreign firms, then encouraged governments around the world to complain about the rule’s reach.

The two-pronged lobbying strategy resulted in foreign officials joining U.S. lenders to push back against the Volcker rule, named after former Federal Reserve Chairman Paul A. Volcker and incorporated in the 2010 Dodd-Frank Act.

It's so good! Step one: appeal to patriotism to convince US regulators that any Volckery needs to apply to foreign banks so that Jamie Dimon doesn't have to like decamp for Sealand or whatever. This is a reasonably good argument, in that there's no particular reason that US rules should weaken the competitiveness of US banks when they can be applied more universally. Step two: appeal to foreign governments to convince US regulators that the application of Volcker to foreign banks, and to trading in government securities (except US Treasuries!), will drive up their financing costs at exactly the wrong time. These are ... well, they're plausibly sympathetic supporters, anyway.

It's all very smart and diabolical and we've talked a bit about step 2 and what I suspect is a related step 3, which is, once foreign government bonds are exempt, go back to appealing to patriotism to convince US regulators that, like, domestic corporate bonds and non-GO munis should also be exempt. Oscillate back and forth until everything is exempt.

I had not paid attention to step 1 before, but it shows a certain amount of long-game thinking: lobby to make the Volcker Rule more restrictive, in order to piss off more people who fall under those restrictions, and have those pissed-off people join you in lobbying to make it less restrictive. Quite nice.

That's all, really. I just think it's neat. I also find it persuasive - I mean, I'm pretty naïve but I do kind of go around thinking that if the people who are going to issue some type of securities X think that the application of the Volcker Rule to X will hurt markets in X, and the people who are going to underwrite X think so too, and the people who are going to buy X think so too, then probably the application of the Volcker Rule to X will hurt markets in X - but then I would think that so whatever.

One thing you might tentatively take away from this is a lesson in bank-government relations. European governments, as you may have heard, have let's say only modest love for hedge funds, but they and their banks are lashed together in an uncomfortable embrace of Greek writedowns and financial repression. Canada is, one would think, relatively happy with its banks.

Fondness for banks in the US is at a low ebb. Fondness for hedge funds is a bit higher, I'd guess, and in any case the dim but cheering memory of Glass-Steagall helps a lot of Americans think that everything will be fine if FDIC'ed banks get out of market making and are replaced by the ghosts of independent investment banks. (Except, to be fair, in Treasuries, where banks are still okay to prop trade to their hearts' content. Even there there are non-bank primary dealers though that has not always worked out great.)

If you need to transform banking industry complaints into government action, then you could always just go to your government with a bag covered in $ signs. That approach I suspect comes with certain risks. Intermediating through a government that is cozier with its banks than ours is - I know, impossible! - is a neat way to achieve those ends more indirectly.

Bank Lobby Widened Volcker Rule, Inciting Foreign Outrage

* This is the last I will say about this except to add: if you ever find yourself reading an argumentative piece that has a paragraph consisting solely of the word "Please," then everything in that piece is wrong with probability 1.

Related

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: