The controversial Volcker rule that regulates proprietary trading came in for a final round of comment as frustrated bankers, anti-Wall Street activists and Paul Volcker himself flooded government regulators with last-minute statements before the deadline Monday at midnight.
The crushing volume of the statements, at nearly 15,000 as of Tuesday morning on the Securities and Exchange Commission’s comments page, may have come as a surprise, though the passionate commentary did not, considering that the Volcker rule has drawn more heated debate than just about any other element in the Dodd-Frank financial reform act.
“I’ve never seen a rule-making response like this before,” said Derek M. Bush, a partner at the law firm Cleary Gottlieb, in an interview with The New York Times’ “Deal Book” blog.
In a comment that typified the frustration of the banking sector, Edward O’Keefe, executive vice president and general counsel for the Bank of America, warned that despite the SEC and other federal agencies’ effort to hammer out a workable rule, the Volcker proposal is rife with unintended consequences, many of which would undermine the safety and soundness of U.S. banking entities and U.S. financial stability if left unaddressed.
“We expect that additional unintended consequences for the products and services we provide to our customers will be revealed as we continue to assess the complex and extraordinarily far-reaching impact of the Volcker rule’s prohibitions on proprietary trading and sponsoring or investing in what the proposal deems to be ‘hedge funds’ and ‘private equity funds,’” O’Keefe wrote.
The Securities Industry and Financial Markets Association also joined in the outcry against what it considers to be narrowly defined permitted activity, which draws “the wrong line” between proprietary trading and market making.
“Portfolio values will decrease” under the law as proposed, SIFMA warned. “The proposed regulations are likely to shrink the savings of fund investors, retirees, pension plan beneficiaries and other investors who rely on SIFMA’s Asset Management Group members to invest their earnings, as decreased market liquidity leads to a decrease in the demand for and price of financial instruments.”
At the same time, Volcker himself came out forcefully against proprietary trading in his letter, written as a 2,000-word essay.
“Proprietary trading of financial instruments–essentially speculative in nature–engaged in primarily for the benefit of limited groups of highly paid employees and of stockholders does not justify the taxpayer subsidy implicit in routine access to Federal Reserve credit, deposit insurance or emergency support,” Volcker wrote.
Backing up Volcker were a number of Democrat senators as well as a coalition group comprising Americans for Financial Reform, Public Citizen, and Occupy the SEC, a sub-group associated with New York’s Occupy Wall Street movement.
Wrote Occupy the SEC in a 325-page letter: “Free from the enforced separation between commercial and investment banking, as originally required by the Glass-Steagall Act, banks now prefer to engage in self-interested proprietary trading rather than pursuing traditional banking activities that actually promote true ‘liquidity’ across markets. Liquidity in opaque financial instruments may have increased in recent years, but real liquidity, which benefits consumers, investors, small business owners, and homeowners, has not followed suit.”
Read more about the Volcker rule at AdvisorOne.com