Federal regulators in charge of writing the Volcker Rule, which would ban federally-insured financial institutions from risky proprietary trading, are moving at a faster pace than expected and could have the rule finalized by September.

Wall Street banks have been lobbying to weaken the rule since it was originally proposed by its namesake, former Federal Reserve Chairman Paul Volcker, and now that it is just months away from finalization, their efforts are getting stronger. The chief executives of six major Wall Street banks, led by JPMorgan Chase CEO Jamie Dimon, traveled to Washington yesterday to personally lobby the Federal Reserve on multiple issues — weakening the Volcker Rule chief among them — Bloomberg reports:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon led Wall Street bosses in a closed-door meeting to personally lobby the Federal Reserve about softening proposed reforms that might crimp their profits.

The contingent, which included Bank of America Corp.’s Brian T. Moynihan, 52, and Goldman Sachs Group Inc.’s Lloyd C. Blankfein, 57, pressed the Fed on rules they said would overstate trading risks and harm financial markets, the central bank said yesterday in a statement. They also discussed what they see as flaws in Fed stress tests designed to gauge the strength of the nation’s largest lenders.

Wall Street banks, with the help of Massachusetts Sen. Scott Brown (R), were able to water down the Volcker Rule even before it became law as part of the 2010 Dodd-Frank Wall Street Reform Act. Since the law passed, they have pushed to make it even weaker, falsely arguing that it poses a major risk to the American economy. The banks have been so successful weakening the rule that Volcker himself was disappointed in its outcome.

Not all bankers oppose the rule. Greg Smith, the former Goldman Sachs trader who publicly resigned from the firm, unknowingly made the case for the rule in an editorial in the New York Times, and a former Merrill Lynch banker recently said the rule was “necessary to correct a mistake that poses a danger to our economy.”

Wall Street banks have pushed to water down and already-weakened version of the Volcker Rule, which bans banks from engaging in risky proprietary trades with taxpayer-backed funds. The banks fought the rule before it became law under the Dodd-Frank Wall Street Reform Act and have kept the fight up since, arguing that the rule would hinder their ability to compete or to lend to businesses.

Roger Vasey, who ran Merrill Lynch’s global debt markets for six years, feels differently. In an editorial published in the Wall Street Journal, Vasey disputed that the Volcker Rule would damage the banks’ ability to make profits and said it was “necessary to correct a mistake that poses a danger to our economy.” That mistake, Vasey wrote, was the 1999 repeal of the Glass-Steagall Act, which prevented government-insured banks from engaging in the risky practices the Volcker Rule would now limit:

The Volcker Rule—part of the Dodd-Frank financial reform law—is necessary to correct a mistake that poses a danger to our economy. [...]

The number and complexity of various financial vehicles has grown over the years, but the principle remains the same. If the potential loss from a bank’s overall position across its securities holdings cannot be projected accurately under various deteriorating market conditions, and effective limits on that position established and monitored accordingly, that position should not exist.

And no financial institution with explicit or implied taxpayer support should be in the proprietary trading business.

Vasey’s experience at Merrill Lynch is a “case in point” that banks can be successful without proprietary trading, he argues. Despite taking “minimal risk,” Merrill Lynch was highly profitable, particularly on the desk Vasey managed. At the time, Merrill operated without government-insured deposits and “avoided taking too much risk” because it feared the exact type of “debt bomb” that caused the financial crisis. But after the repeal of Glass-Steagall, banks that did have government backing were able to take much riskier positions, putting taxpayers at risk when the crisis occurred.

Vasey isn’t the only former Wall Streeter to support the Volcker Rule. Former Goldman Sachs employee Greg Smith unwittingly made the case for the rule when he resigned from the firm via an editorial in the New York Times, and former Citigroup CEO John Reed has gone even farther, calling the rule a “critical response” to the prop trading problem but criticizing it for not imposing stiff enough penalties on institutions that violate it.

Members of Congress who submitted comments advocating the weakening of the already watered-down Volcker Rule — which is meant to rein in banks’ risky trading — have received more than four times as much in campaign contributions from the financial sector as members who demanded stricter regulations, a report released today by Public Citizen reveals:

Those seeking to weaken the rule have received $66.7 million from the financial services industry since the 2010 election cycle compared to only $1.9 million in contributions received by those asking for a more robust rule. Those seeking to weaken the rule have received an average of $388,010 from the industry, more than four times as much as the average of $96,897 received by those asking for a stronger rule.

“Members of Congress should not serve as megaphones for industry’s claims,” said the report’s co-author, Negah Mouzoon, a researcher for Public Citizen’s Congress Watch division. “They should amplify the public’s call to prohibit banks from engaging in the same risky financial activities that contributed to the financial meltdown of 2008.”

The Securities and Exchange Commission received more than 18,000 comments before the public comment window for the Volcker rule closed on Feb. 13. Of the 20 separate letters submitted by U.S. legislators, 17 were signed by 172 members demanding changes that would weaken the rule, while just three letters signed by 20 members recommended steps to strengthen it.

The report’s findings come after a coordinated four-month lobbying blitz headed up by finance behemoths like Goldman Sachs, JPMorgan Chase, and Credit Suisse Group. And those lawmakers in favor of weakening the rule seem to have swallowed the financial industry’s doomsday predictions about its effect hook, line, and sinker. The banks’ general aim was to pressure federal agencies into delaying and weakening the Dodd-Frank Wall Street reform law, and on that score, their campaign was relatively successful, as lawmakers have signaled they are prepared to revise the rule.

– Fatima Najiy

Goldman Sachs executive director Greg Smith became a former Goldman Sachs executive director this morning after he penned a resignation letter in the New York Times that confirmed virtually every negative characterization of the bank. Smith slammed the “toxic and destructive” Goldman environment, in which directors referred to their clients as “muppets” and traders worried not about the interests of clients but about the size of their profits.

In the editorial, Smith described how Goldman’s thirst for profits at all costs developed:

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm…you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Perhaps unintentionally, Smith’s editorial made a compelling case for the Volcker Rule, an element of the Dodd-Frank Wall Street Reform Act that would prohibit proprietary trading at federally-backstopped institutions. Banks like Goldman, which made billions of dollars by making “shitty deals” that sold mortgage-backed securities and other complex derivative products to unwitting customers then turned to taxpayers for a bailout when too many of those deals went sour, would no longer be able to make those trades without giving up access to the Federal Reserve’s emergency lending and the FDIC’s backing. (Remember, Goldman converted into a bank holding company at the height of the financial crisis, in order to access the Fed’s emergency lending programs.)

Predictably, the banking industry opposes the Volcker Rule and has spent the last two years trying to kill it. Bank lobbyists were able to water down the rule before it even became law and, since it passed, have attempted to make it even weaker, arguing that it will have substantial costs for the American economy.

In reality, the Volcker Rule shifts risky proprietary trading to actual investment firms, hedge funds, and other “small-enough-to-fail” institutions that, unlike banks, don’t have the backing of the federal government. That will undoubtedly make banks like Goldman Sachs smaller and less profitable. But as Smith made clear today, that’s not necessarily a bad thing.

Ever since it was first proposed, the financial services industry has launched a withering assault on the Volcker rule, a regulation meant to rein in the ability of banks to gamble with their customers’ deposits. The banks were able to water the rule down before it was passed into law — thanks in no small part to Sen. Scott Brown (R-MA) — and have now submitted a heap of comments to the regulators charged with implementing the rule, in hopes of watering it down even further.

But not all members of the financial industry are against the Volcker rule. In fact, former Citigroup CEO John Reed submitted a letter to the Securities and Exchange Commission saying that the rule does not go far enough in preventing the banks from engaging in risky trading with deposits:

When a firm is focused on market gain, it will employ every available device to achieve those gains – including taking advantages of clients and putting the firm at risk. And. when it is large enough to be a threat to systemic stability, it is able to avoid the constraints of market discipline which apply to smaller actors In short, little will stand in the way of it becoming a threat to systemic stability.

The Volcker Rule is a critical response to this problem. and the proposed rule takes an important step forward in pulling into place the prohibition on proprietary trading and positions in private funds. However, I am concerned it docs not offer bright enough lines or provide strong enough penalties for violation.

Reed called for “specific and vigorous penalties” for traders who break the Volcker rule, as well as a provision requiring banks’ senior officers to sign forms attesting to their firms compliance with the rule.

Reed is no saint when it comes to regulatory matters, as he was instrumental in bringing down the barrier between investment banking and commercial banking in the 1990s, which laid the groundwork for today’s mega-banks and the financial crisis of 2008. However, he has since acknowledged that his position then was a mistake, and has pushed for strong financial reform, including breaking up the biggest banks. (HT: Huffington Post)

One of the most important pieces of the Dodd-Frank financial reform law is the Volcker Rule, aimed at preventing federally-insured banks from engaging in risky proprietary bets and counting on taxpayers to bail them out if those bets go wrong. The deadline for regulatory comment on the rule was Monday night, and it didn’t go quietly. Outside groups submitted 170,000 words worth of comments, most of them (though not all) aimed at weakening the rule before it takes effect in July.

The industry threw “one last roundhouse punch at the law,” and most of the letters from across the financial industry were negative. Among the rule’s most vocal opponents: JPMorgan Chase CEO Jaime Dimon and the U.S. Chamber of Commerce, according to the Wall Street Journal:

Opponents minced few words. J.P. Morgan Chase & Co. said the proposed rule “appears to take the view that banking entities, their customers, and the economy must pay almost any price in order to ensure absolute certainty that there can never be an instance of prohibited proprietary trading.” [...]

“In short, the American engine of economic growth will be deprived of the fuel needed to operate,” the U.S. Chamber of Commerce wrote.

What the industry doesn’t mention in its effort to weaken the rule is just how successful it has been in watering it down already. With the help of Massachusetts Sen. Scott Brown (R), the industry weakened the rule even before it became law, and it has spent the last year lobbying to make it even weaker. By the time it was unveiled, it was so weak that former Fed Chair Paul Volcker, for whom it is named, said he didn’t like it.

And while opponents of the law continue to argue that it will cost the nation’s largest banks substantial sums of money, that is precisely how the law aims to create the long-term economic stability that didn’t exist prior to the financial crisis. As Reuters’ Felix Salmon wrote today, the proprietary trading prohibited by a strong Volcker rule “doesn’t just disappear.” Instead, it moves to hedge funds, brokers, and other “small-enough-to-fail institutions” that aren’t backed by taxpayers:

In other words, there is a list of institutions which will be harmed by the Volcker Rule. Here it is: JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley. 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.

Like with the Dodd-Frank law as a whole, banks and their lobbyists aren’t satisfied with watering down the Volcker rule before it passed. The industry continues to push back against regulations aimed at preventing the sort of crisis that drove the country into a deep recession four years ago, all under the false premise that what is bad for Wall Street’s balance sheet has to be bad for the American economy as a whole.

One of the key reforms included in the Dodd-Frank financial reform law is the Volcker rule, which is aimed at preventing banks from making risky investments with funds that are backed by the federal government. As we wrote when the rule was being debated in Congress, “the overarching goal [of the Volcker rule] would be to ensure that federally backstopped institutions stick to core banking practices such as lending and deposit taking while removing the federal safety net from riskier activities that are divorced from customer services.”

The rule is named after former Federal Reserve Chairman Paul Volcker, one of the foremost proponents of strong financial regulation aimed at preventing a replay of the 2008 financial crisis. When the Volcker rule first became law, Volcker himself was reportedly disappointed in how weak Congress had made it. Now that regulators have officially released a draft version of the rule, the verdict is in — Volcker isn’t on board with the rule:

“I don’t like it, but there it is,” Mr. Volcker told me in his first public comments on the sprawling proposal.

“I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I’d have strong regulators. If the banks didn’t comply with the spirit of the bill, they’d go after them.”

As former Sen. Ted Kaufman (D-DE), who was one of the loudest advocates of a strong Volcker rule, put it, “Here’s the key word in the rules: ‘exemption’…Let me tell you, as soon as you see that, it’s pronounced ‘loophole.’ That’s what it means in English.” The law does indeed include wide exemptions and poses hundreds of questions for regulators to consider moving forward (which the banking lobby surely would be happy to provide answers to).

Thanks to the handiwork of Sen. Scott Brown (R-MA), the Volcker rule was watered down before it even got out of the gate. And now it seems like the banking industry is succeeding in turning it into a piece of Swiss cheese that won’t end Wall Street treating federally backed money like chips in a casino.

The Senate Permanent Subcommittee on Investigations released a scathing 650-page report yesterday detailing some glaring examples of Wall Street’s malfeasance leading up to the 2008 financial crisis. Two of the highest-profile culprits in the report are Goldman Sachs and Deutsche Bank, as emails from both institutions reveal that they were selling securities that they knew were toxic and then shorting those same securities to turn a profit.

For instance, one Deutcshe Bank trader, Greg Lippman, described the assets his bank was peddling as “crap” and “an absolute pig”:

– Email regarding GSAMP 06-NC2 M8, an RMBS security that contained New Century loans and was issued by Goldman Sachs: “[T]his is an absolute pig.” (12/8/2006)

– Email describing ABSHE 2006-HE1 M7, a subprime RMBS security issued by Asset Backed Securities Corporation Home Equity Loan Trust, as a “crap deal”; and describing ACE 2006 HE2 M7, a subprime RMBS securitization issued by ACE Securities Corp., as: “[D]eal is a pig!” (3/1/2007)

Goldman Sachs did the same thing (in less colorful language), going so far as to tell investors that it’s interests “were aligned” with their own, even as it was spending billions betting against the very securities that it was selling. In all, Goldman “generated net revenues of $3.7 billion” betting against securities.

Aspects of the Dodd-Frank financial reform law were “designed to address and reduce these conflicts.” The most important of these provisions is known as the Volcker Rule, which would limit the ability of large investment banks like Goldman Sachs to trade for their own account, outside of doing business for their customers. But these very provisions are under attack by Republicans in Congress.

In a hearing today, House Republicans are expected to push the Financial Stability Oversight Council — the new body tasked with monitoring systemic risk in the financial system — to water down the Volcker Rule. Sen. Orrin Hatch (R-UT) said earlier this week that he is concerned that trading restrictions, including the Volcker rule, will simply be “unduly burdensome regulations.” Over at ThinkProgress, Ian Millhiser goes over the potentially criminal aspects of Goldman’s actions.

During the final hours of debate over what became the Dodd-Frank financial reform law, lawmakers inserted an exemption to the Volcker rule, which is meant to prevent banks from trading for their own benefit with federally insured money. Added at the behest of Sen. Scott Brown (R-MA), the exemption allows banks to invest three percent of their capital in risky hedge funds and private equity firms.

This was a lousy compromise that undermined the original goal behind the Volcker rule. Former Federal Reserve Chairman Paul Volcker — for whom the rule is named — expressed disappointment at the time that the rule had been diluted. “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 has said.

And now, with financial reform no longer in the headlines, the banks are hoping to make the already weakened rule even weaker:

In comment letters to regulators studying how to implement the rule, banks are seeking laundry lists of carve-outs, including broad exceptions from what is considered proprietary trading and greater freedom to invest in private-equity firms and hedge funds…The length and breadth of the exceptions being sought run the gamut.

Specifically, Bank of New York Mellon, Northern Trust, and State Street are looking to exempt certain investments from counting towards the three percent cap.

Volcker, for his part, has been warning the regulators against watering the rule down any further. “Clear and concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators as they implement and enforce this law,” he said. A group of Senators led by Sen. Carl Levin (D-MI) — who was one of the Volcker rule’s biggest advocates during the financial reform debate — have also penned a letter to regulators stating that “[Congress] provided you with a clear mandate and broad authority to act. The American people are now relying upon you to fully carry out the law.”

American Banker characterized the financial services industry as desiring “so many exceptions from the Volcker Rule’s limits on risky activities that it might as well not exist at all.” If regulators give in to the industry’s demands, the rule will indeed amount to nothing.