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.