How Big Banks Suckered Foreign Governments Into Helping Them Lobby Against Rule Restricting Risky Trading

It’s no secret that the nation’s biggest banks have been trying to kill off the Volcker rule, the regulation named after former Federal Reserve Chairman Paul Volcker that is meant to rein in the banks’ riskiest trading. The banks, with the help of Sen. Scott Brown (R-MA), watered the rule down before it even became law, and have been heavily lobbying to make it even weaker ever since.

And according to Bloomberg News, the banks even ginned up foreign outrage against the rule, by first pushing regulators to include stricter restrictions on trading by foreign firms, and then getting foreign governments to oppose the rule because of those restrictions:

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.

“The criticism of foreign governments on behalf of their banks is helping U.S. banks fight the rule,” said Anat Admati, a professor of finance at Stanford University. “It also muddies the water, shifting the debate away from the main issue, which is reducing the risks banks impose on the economy.”

So the banks pushed for the rule to affect foreign firms more than it had, and then pushed foreign governments complain about the effect the rule would have on their banks. It’s a brilliant strategy to turn the focus away from the banks own malfeasance and to generate an ally where there hadn’t previously been one.

As ProPublica’s Jesse Eisenger noted, when it comes to the Volcker rule, “bank lobbyists with complicit regulators and legislators took a simple concept and bloated it into a 530-page monstrosity of hopeless complexity and vagueness.” And there’s no denying the need for a rule to prevent the sort of trading that the Volcker rule is supposed to prevent. As Donald van Deventer wrote in American Banker, “I can name at least four institutions that effectively ‘went under’ and required taxpayer support because of proprietary trading gone bad: Citigroup, Bank of America, Morgan Stanley, and Royal Bank of Scotland.”

The Volcker rule will undeniably hurt profits at the nation’s biggest banks. But that’s a feature of the rule, not a bug. As Reuters’ Felix Salmon put it, “These institutions should get smaller. These institutions should be less profitable. There’s no reason to believe that when that happens, the economy as a whole will suffer.” But in order to preserve their ability to gamble their way into oblivion the banks are doing everything that they can, including manipulating foreign governments into pressing for a less secure American financial system.