In the Dodd-Frank law's sprawling package of financial reforms, the Volcker rule stands out as one of few measures with the potential to take a big bite out of bank profits.
The rule, named for former Federal Reserve chairman Paul Volcker, would force banks to shut down potentially lucrative units that make bets with the institution’s own assets, on the grounds that they shouldn’t play hedge fund manager with shareholder money. The Dodd-Frank law devotes nearly 5,000 words to the Volcker rule, but as with so much in the legislation, the architects left plenty of leeway for regulators to bend and shape how the final rule looks.
Given the stakes, and the uncertainty, the public comment period that ended last Friday attracted plenty of attention.
In its broadest terms, the debate is a philosophical disagreement over the role of banks in society. Should they focus on “primary purposes,” such as taking deposits and making loans, as groups like the Council of Institutional Investors said in a letter to the Financial Services Oversight Council?
Or, is the Volcker rule “a solution in search of a problem,” one that impedes the ability of an institution to make fair profits and may have cascading ill effects, such as driving clients and even the banks themselves to less-regulated European soil, as Spencer Bachus, the ranking Republican on the House Financial Services Committee, has argued?
A look at the public comments suggested that individuals who weighed in tended to side with the former opinion.
One comment, from an individual who identified herself only as “Rainbow Sally,” said that she was concerned about Wall Street banks' risky trading.
“How many middle class families did they foreclose that they could have supported on just their ‘bonuses’ that they reaped for driving us into a ditch?” she wrote. The author also objected to the electronic form for public comments that asks for the writer’s organization, saying, “Why is my ‘organization’ important? Organizations don’t vote!”
In another comment, Robert Fosburgh, who identified himself as “Jobless Middle-Class,” also opposed any loopholes for bank trading. “I am writing as a **Pissed-off American** affected by the financial meltdown and bailouts caused by Wall Street banks’ high-risk trading,” Fosburgh said.
Both incorporated language suggested by Americans for Financial Reform.
Others submitted language cut-and-pasted from PublicCitizen’s “Citizen Vox” blog, which describes itself as a non-profit that stands up to corporate interests. “Banks should be in the business of lending to America’s small businesses and families, not using our money to run a private casino where the House always wins,” many submitters wrote.
An American Bankers Association attorney, on the other side, sought to limit the scope of the Volcker rule. The ABA considers itself the voice of the $13 trillion banking sector and its two million employees.
“We have concerns that certain definitions could be read so broadly that they impact traditional banking activities, while not addressing the intended focus of the Volcker Rule to reach situations where there are significant conflicts of interest,” Lisa Bleier, a senior counsel, wrote on behalf of the organization. Bleier wrote that definitions for hedge fund, private equity fund and “such similar funds” were too broad.
All told, more than 1,500 commenters weighed in with their views on www.regulations.gov, according to Financial Reform Watch's search of the site (search "FSOC" for Docket No. 2010-0002 to look at submitted comments). The Wall Street Journal reported that the three regulatory agencies charged with implementing the Volcker rule — the Fed, the Securities and Exchange Commission, and the Treasury Department — received 8,000 letters and e-mails in total.
While the online comment form let average Americans go head-to-head with the powerful banking lobby, in-person meetings with agency officials were reserved for those with a little more political punch.
Giant investment fund TIAA-CREF, JPMorgan Chase, and others have met with Fed officials to discuss the Volcker rule, according to disclosure documents posted on the Fed's website. Goldman Sachs, Credit Suisse, and Morgan Stanley have argued in meetings with Treasury officials that they should have wide trading flexibility when clients are involved or when the trades are meant to manage risk, the Wall Street Journal reported, citing people familiar with the discussions.
What will the regulators decide? Michael Greenberger, a professor at the University of Maryland School of Law, said in his comment letter that he simply wants the rule to be drafted in a way that is "consistent with the legislative intent."
That's easier said than done.