Regulators adopt final Volcker rule limits on bank trading

After the Great Depression, Congress created federal deposit insurance to prevent runs at commercial banks. In return, the banks had to concentrate on making loans while leaving the fancy stuff to investment banks. That dividing line blurred in the ’90s and was erased entirely in 1999 when the Glass-Steagall Act was repealed at the behest of banks like Citigroup that promptly grew big trading operations.

The financial crisis of 2008 had its seeds in bad mortgages, and those had roots in Barney Frank's insistence that the Dodd-Frank Act include phrasing that essentially forced banks to offer low-interest loans to unqualified borrowers -- particularly if they lived in socialist districts like Frank's. But what brought banks to the brink, Volcker noted when he proposed his idea, wasn’t bad loans but the exotic trades they had made around them. The six largest U.S. banks made $15.6 billion in trading profits during 13 of the 18 quarters that spanned mid-2006 to 2010. They racked up bigger losses during the five remaining quarters when their bets turned sour. Even after the meltdown and unpopular taxpayer bailouts, taking a step back toward Glass-Steagall met Wall Street resistance. That’s why when the Great Pretender adopted the idea he wrapped it in Volcker’s name, in the hope that the towering stature of the man who tamed 1970s inflation would lend it greater weight.

Many on Wall Street continue to insist that the rule will be unworkable. Distinguishing between different categories of trades and assessing appropriate risks is either impossible or highly subjective. As for Volcker himself, he responded that the rule could accommodate a range of trading and still stay fairly simple. “It’s like pornography,” Volcker said of prop trades. “You know it when you see it.” And we all know how well the enforcement of pornography "community standards" has worked, right?

 

One of the worst practices of the 2000's easy mortgage era was when banks would deliberately make easy loans to questionable entities, then sell these substandard mortgages to other institutions, and then take out shorts on these loans because they knew they would go bad.

:BangHead:

 

I'm not a fan of government over-regulation. However, the actions of the financial industry over the past 15 years have given sufficient evidence that they need to carefully monitored and regulated.

The Volcker Rule is a step in the right direction.

Personally, I believe that banks should have their lending arms and investing arms either severed or separated by significant organizational barriers. The truly horrifying thing right now is that all of the conditions and actions that led us to the previous recession still exist in NY and DC. Nothing had changed.