Volcker Reportedly Disappointed In Final Version Of His Proprietary Trading Ban

During the 20 hour negotiating session that produced what is now the first version of the Dodd-Frank financial regulatory reform bill, conferees added an exception to the Volcker rule — which bans banks from trading for their own benefit with federally insured money — sought by Sen. Scott Brown (R-MA). The exemption allows banks to invest 3 percent of their tier one capital in risky hedge funds and private equity firms and to continue managing those firms.

The namesake of the Volcker rule — former Federal Reserve Chairman and current Obama administration adviser Paul Volcker — had warned against watering it down in precisely this way. “Allowing a bank to invest in a speculative fund goes against the very intent of the bill as we seek to define those activities that are worthy of government protection,” he said. So it shouldn’t come as much of a surprise that he’s disappointed with the final product:

Volcker, the 82-year-old former Federal Reserve chairman, didn’t expect the proposal to be diluted so much, said a person with knowledge of his views. He’s content with language that bans banks from trading with their own capital, the person said.

Sens. Carl Levin (D-MI) and Jeff Merkley (D-OR), who proposed the toughest version of the Volcker rule during the regulatory reform debate, “were also dissatisfied with the result, for the same reasons as Volcker.”

The final bill that came out of conference undeniably has some warts that are unfortunate. In addition to the watered down Volcker rule, it has an unjustifiable exemption for auto dealers from new consumer protection laws and a weakened version of Sen. Blanche Lincoln’s (D-AR) derivatives spin-off. That said, it still make huge strides toward building a financial system that doesn’t have its incentives entirely backwards and that puts consumer protection on a more even-footing with bank profits.

But Volcker’s disappointment shows that passing a single piece of legislation isn’t the end of creating a financial system that’s stable and fair. This point was underscored this week by a New York Times report that the financial services industry is turning its attention from lobbying lawmakers to lobbying regulators who will be tasked with designing and implementing the new rules of the financial road:

Well before Congress reached agreement on the details of its financial overhaul legislation, industry lobbyists and consumer advocates started preparing for the next battle: influencing the creation of several hundred new rules and regulations…[The bill] is notably short on specifics, giving regulators significant power to determine its impact — and giving partisans on both sides a second chance to influence the outcome.

The implementation of some provisions in the bill will quite literally take years, so the banks will have ample opportunity to bend them to their advantage. It’s worth paying attention to.