Three-Tiered Obfuscation and Nullification of the Volcker Rule

It suddenly dawned on me that the regulations are not there to regulate. They are spelled out so that the participants - the industry (like financials) and politicians fed by the industry - can do everything and anything that is NOT written and the regulators can safely look the other way.

Case in point: the Volcker Rule (prop trading regulation) in the Dodd-Frank (or DONK) financial "reform" bill.

Financial Times reports:

US regulators want to use techniques pioneered in the fight against money-laundering to crack down on “proprietary trading” by banks as part of new financial reforms, according to bankers and officials.

The question of how to define trading done with banks’ own funds is one of the thorniest for the US authorities in the post-crisis regulatory overhaul as it is difficult to differentiate such activities from market-making on behalf of clients.

The “Volcker rule”, proposed by the former Federal Reserve chairman Paul Volcker and included in last year’s Dodd-Frank law, aims to reduce banks’ risk-taking by forbidding them from placing short-term trading bets.

Draft guidelines for the Volcker rule are being circulated among members of the Financial Stability Oversight Council, the body of regulators charged with defining the rules of the road for the financial system. Publication of a final version is planned in the next two weeks.

After months of internal discussions and talks with banks, which have mounted a vigorous lobbying campaign, regulators are leaning towards a “multi-tiered test” like those used to detect illegal money transfers.

The first tier would involve automated “tripwires” that alert banks’ compliance departments.

People involved in the talks said that, depending on the market and the trade, “tripwires” could be the length of time a trader holds a position, its size, riskiness, or other measurable criteria. In detecting money laundering, banks look at “filters” such as size and provenance of a transfer.

The second tier would see internal compliance and risk management departments quiz the trader on the nature of the position. Finally, regulators, that keep inspectors on banks’ premises, will also be able to see the “tripwires” and monitor both traders and compliance departments.

Banks are likely to welcome this approach, after arguing that a strict definition of proprietary trading based on one-size-fits-all metrics would have cut off liquidity to large swaths of global capital markets.

So, in summary, the three steps are:

1. "Tripwires" - length of the trade, size, riskiness, and other measurable criteria to be automatically triggered;

2. Bank's internal compliance and risk management departments ask the trader about the trade;

3. Regulators may see the "tripwires" and monitor the bank.

I have to laugh out loud. They almost read like sort of a reverse-manual of what to avoid so as to prevent the "tripwires" from being triggered. Besides, how are they going to regulate traders when 80% the trades are done by HFT algo bots? Are they going to regulate only the carbon-based traders?

No wonder Wall Street banks are happy, and Mr. Volcker is leaving the White House.

But not to worry. Obama will be well-managed by his new handler, aka chief of staff, from J.P.Morgan Chase to restore confidence. CONfidence.

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Reuters: Paul Volcker Leaving the White House

I was surprised that he hadn't left already, when the so-called "Volcker Rule" was effectively rendered null and void by the usual suspects on Wall Street that extends to various branches and agencies of this government.

Reuters reports:

(Reuters) - Former Federal Reserve Chairman Paul Volcker plans to leave his role as head of a panel of experts advising President Barack Obama on the economy, sources familiar with the decision said on Wednesday.

The departure of Volcker, 83, as head of the President's Economic Recovery Advisory Board is among a series of changes under review at the White House.

The decision to leave the board was Volcker's. A source close to him said he was ready to continue to advise Obama on an informal basis as often as the president would like.

Volcker, who became a legendary figure on Wall Street when as Fed chief he broke the back of double-digit U.S. inflation in the early 1980s by sharply raising interest rates, began advising Obama during his 2008 presidential campaign and has wielded clout on issues ranging from financial regulation to fiscal policy.

The former Fed chairman was the driving force behind the "Volcker Rule," a provision in last year's financial reform bill that puts limits on Wall Street banks' proprietary trading.

Many on Wall Street vigorously fought the Volcker Rule and some sought to portray Volcker as out of touch with the modern financial system. But he has also received credit for reining in financial industry excesses that helped prompt the global economic crisis.

"My feeling is job well done," said Thomas Russo, a partner in Gardner Russo & Gardner, a Pennsylvania investment manager with assets under management of $2.38 billion.

Job well done, indeed. Wall Street banksters got what they wanted. Prop trading simply changed the name. Insider trading is not only rampant, but that's how Wall Street has operated for decades.

But at least, as Zero Hedge points out, Volcker has fought high inflation. What's left with us is a mad professor from Princeton, printing $100 billion a month to create inflation, thinking he can control it 100%. Oh, and the president who likes to campaign but cannot be bothered to do the actual work of governing (or at least get out of the way and cause no major harm).

We have a bright future here in this country, don't we? Wall Street is left free to defraud the taxpayers - whether it's the foreclosuregate or a bogus settlement with GSEs (by Bank of America), and continue to stash away the money that the mad professor at the Fed gives them almost every single day. In return, they will do their utmost best to prop up the stock market so we can feel rich as we pay $5 for a gallon of gasoline or $8 for a loaf of bread, or $20 for a pair of cotton socks.

Reuters' article above also reports that Gene Sperling is set to replace Larry Summers. Mr. Sperling was a consultant to Goldman Sachs and earned close to $900,000 in 2008.

And the man set to become Obama's chief of staff, William Daley, works for J.P.Morgan Chase, and the brother of Richard Daley.

Volcker is right to leave from this sewage of the White House. He should have left long time ago.

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Volcker and Bernanke: Of Same Mind about Fed

Contiuing on the theme of "Everything is alright now", let's go to today's Bloomberg article. It's about Paul Volcker, who many people secretly, and some openly, hoped would replace Ben Bernanke and return to the Federal Reserve as the chairman. He would clean up the Fed, the greedy banksters, he would know what to do, unlike Bernanke.

So much for that. Volcker and Bernanke are of the same mind when it comes to the Federal Reserve and the Fed's regulatory power over the nation's financial industry. Volcker probably wouldn't have done any differently than Bernanke.

Volcker Looms Larger as Ties With Bernanke Strengthen
(Rich Miller, 2/2/2010 Bloomberg)

"Feb. 2 (Bloomberg) -- Paul Volcker is enjoying increased influence with the Federal Reserve as well as the Obama administration, central bank records show.

"Volcker, who headed the Fed from 1979 to 1987, met current chairman Ben S. Bernanke six times in the year through November, the latest month that the Fed has made its records available. In the prior year, the two men only got together once.

"“Volcker has had very strong views on regulation going way back,” said Lyle Gramley, who served as a Fed governor under Volcker and is now a senior economic adviser to New York-based Potomac Research Group. “It would be logical for Bernanke to talk to him about financial reforms” as policy makers wrestled over how to prevent another crisis.

"Bernanke in the past year has advocated tighter rules for banks’ capital, leverage and liquidity, moving closer to Volcker’s view that more regulation is necessary to protect the financial system. “We cannot lose sight of the need to reorient our supervisory approach and to strengthen our regulatory and legal framework,” Bernanke said in a speech on Oct. 23. "

"...“Ben has been through the fire,” Volcker said in a telephone interview. “He’s much better qualified now than he was four years ago, before he went through that experience.” "

Just like all was forgiven for Geithner with Obama's hug, Ben's past mistakes are forgiven by Volcker. Bernanke has learned, and Volcker is satisfied. All is well.

Volcker, who had been somewhat marginalized within the Obama administration until a few months ago, clearly has no intention of rocking the boat.

"Volcker initially voiced concern about the Fed’s actions in combating the crisis, telling the Economic Club of New York in April 2008 that the central bank had acted at “the very edge” of its legal authority in helping to rescue Bear Stearns Cos.

"When he next appeared before the club, on Jan. 14, Volcker devoted much of his speech to a pitch for the Fed to retain a role as a financial supervisor. His comments came a day after Bernanke sent an 11-page paper making the same argument to members of the Senate Banking Committee. "

For Volcker, it's "the Federal Reserve above all".

"That anger -- and the threat it poses to the central bank’s independence -- may have convinced Volcker to step up his support of Bernanke and the Fed, said former Fed economist David Jones, president of Denver-based DMJ Advisors and author of four books on the central bank.

"“His dedication to the principle of central banking independence has no limits,” added Neal Soss, who served as Volcker’s assistant from 1981 to 1983 and is now chief economist for Credit Suisse Holdings USA Inc. in New York.

"Volcker endorsed giving the Fed the power to guard against risks to the financial system as a whole in an opinion article in the New York Times on Jan. 30. "

All is well. Nothing to see here. Move along.

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Obama Hugs Timmy, and Everything Is Alright

Little 'Toinette, trying best not to look at her straight, says to Madame Du Barry, "There are so many people at Versailles today."

Madame Du Barry smiles a smile of victory, and the whole court erupts in cheer. "The Dauphine finally spoke to Madame Du Barry [Louis XV's official mistress]! All will be fine from now on!"

And so Obama hugs Timmy Geithner and all is well on the Imperial Court of Capitol Hill.

Capitol Hill Insiders Say Obama Hugging Geithner Changed Everything (John Carney, 2/1/2010 Business Insider)

"The end of Tim Geithner has itself come to an end.

"Sources on Capitol Hill say that Geithner's status was re-elevated last week when president Obama embraced him before the State of the Unions address.

"That is a 180 degree reversal in the perception of the Treasury Secretary's fate from just over a week ago. Back then people thought Geithner had basically been fired.

""When the president hugs you in front of every member of the US Senate and every member of the House, that's a signal that you still have the power," one Senate staffer told us.

"Others on Capitol Hill we spoke to agreed.

""It was a clear message that the perception from the Volcker announcement was wrong. Geithner is still in Obama's inner circle," another staffer said.

"The hug that changed the perception on Capitol Hill was preceded and followed by administration members talking to reporters and bloggers behind the scenes, saying the symbolism of the Volcker press conference had been misinterpreted. That message has now sunk in.

"At least in the eyes of many lawmakers and staffers on Capitol Hill, Geithner is back."

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Obama's Bank Proposal: Back to Good (or Bad) Old Days?

President Obama launched a fresh attack on the nation's large banks today, as anticipated, in which he is proposing a ban on the banks' proprietary trading and investment in hedge funds. The tongues are wagging that it was Paul Volcker, not Timmy Geithner, who was standing next to Obama.

Paul Volcker was the chairman of the Federal Reserve from 1979 to 1987.

Options started to be publicly traded in 1973, with the creation of the Chicago Board of Option Exchange (CBOE) and the Option Clearing Corporation (OCC). "For the first time, the general public is able to trade call options under the performance guarantee of the OCC and the liquidity provided by the market maker system." (Optiontradingpedia.com)

Put options were introduced in 1977.

Hedge funds, the first of which is said to have been created in 1948 by Alfred Jones, operated under the radar until late 1980s. The industry's explosive growth came in 1990s and 2000s. One of the most successful hedge funds to date, John Paulson's Paulson & Co., Inc. was founded in 1994.

Individual investors and traders started to use discount brokers when the Internet became widely accessible and easier to use with the graphic user interface - Internet browsers (Mosaic, quickly followed by Netscape) running on Windows 3.1, in mid 1990s.

Financial markets with fully electronic execution and similar electronic communication networks developed in the late 1980s and 1990s, the birth of the current quant (or algo) trading.

Algo trading and high frequency trading have been used increasingly since 2007 both by buy side (eg. mutual funds, pension funds, investor-driven institutional investors) and sell side (eg. market makers, hedge funds). Currently, 70 to 80% of the stock trading volume in the U.S. is attributable to the algo/high frequency trading.

Direct Edge, which rules in high frequency trading and flash trading, was founded in 2005. Its current owners are ICE, Knight Capital, Citadel, Goldman Sachs, and J.P. Morgan Chase. SEC's call to ban flash trading has gone nowhere.

No offense to Mr. Volcker, but I have this feeling that he just wants everything financial to be back to when he was the Fed chairman, back to what he knew best. I don't know what will happen to these big banks targeted by Obama, but I don't think small retail investors and traders necessarily want to see the return of the 70s and 80s.

The whole idea of "punishing the banks" into smaller, lower-risk entities also fits well with other financial proposals that have surfaced under the Obama administration. These proposals have emphasis on safety or security, low risk, but are likely to end up with high cost to the taxpayers.

Stuffing at least part of 401K and IRA with special Treasury bonds that would serve as "annuities" is one such proposal. The government wants to make sure that our retirement investment is safe. These days I wouldn't call U.S. Treasury bonds safe, but again, this "safety" is not for us; it is for the government who will be able to thus secure the captive buyers of its $1 trillion-plus debt year after year.

Another one is the trading tax being proposed by an Oregon Democrat and supported by the labor union. It is supposed to somehow reduce the risk by discouraging investors from buying and selling securities, but all it would do is to raise the cost of trades by several hundred percent for ordinary investors.

Outside the financial proposals, how about the whole-body scan at the nation's airports so that the passengers are safe? Equivalent of taking off everything you have on you, without actually taking anything off. But if you have nothing to hide, why would you protest? By the way these scanners are pricey, and one of the manufacturers is represented by the former Homeland Security chief Michael Chertoff.

The government will do whatever they want to do, because they can. Just don't get suckered into their antics simply because they say "it is to protect the American taxpayers." They always say that.

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Obama Wants to Ban Proprietary Trading

as expected. But wait, there's more. He also wants to ban investment in hedge funds by the banks. The stock market dives. Thank you Mr. President.

In the statement released by the White House this morning:

The proposal would:

1. Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

2. Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

The number 2 item is interesting. I'd love to see the detailed proposal. How is he going to limit the size of liabilities, other than levying a 0.15% tax which he already proposed this month? When does a growth become "excessive"? Who's to decide? Paul Volcker?

If Obama really wants to "put an end to the risky practices that contributed significantly to the financial crisis", he should first fire Ben Bernanke and Timmy Geithner, shut down Fannie and Freddie, stop making subprime loans via FHA, and reign in his runaway spending.

Cynics are saying that Obama wouldn't do anything that would anger one of his biggest sponsors (financial industry, particularly Wall Street banks), and this proposal was already agreed to by Wall Street.

I am not so sure. If Obama had gone to Larry Summers or Timmy Geithner and come with the proposal, that's one thing. But he went to Paul Volcker, whom he hadn't bothered to consult much till this issue. Volcker may genuinely believe that banks should go back to the ways he knew when he was the Fed chairman (1979 to 1987), before all the innovations (like algo trading) and proliferation of hedge funds took place (more later).

Currently, Dow Jones Industrial is down more than 220 points (over 2%) to 10,384 at 2:24 PM EST. Many of the same cynics are saying this is just Wall Street's way of scaring investors and scaring the government so that this proposal won't be enacted, just like Wall Street supposedly did (as they say) in September 2008. Back then, the banks deliberately tanked the market during the TARP discussion in Congress so that Congress would be scared into passing the bailout bill.

One thing these cynics seem to ignore: the market tanked in earnest AFTER the bailout bill was passed.

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