The Details Devils
October 22, 2011 § Leave a comment
“The Devil is in the details” is an over-used cliche to express caution and some skepticism concerning generalities, policies or aphorisms. Right now there is a struggle going on between the financial oligarchs on Wall Street and the government’s effort to reduce their power to threaten the stability of the financial system upon which the economic security of our citizens depends. The struggle concerns the regulatory structure that is necessary to implement and enforce the provisions of Dodd-Frank, the limited and somewhat timid attempt by Congress to prevent a recurrence of the 2008 financial debacle. That structure will represent the “details”. Those details will determine whether or not we will remain potential hostages to the whims and greed of these Wall Street “Devils”.
I have had difficulty following the course of this struggle. The weapons and strategies employed by both sides are arcane (at least they seem so to me) and complex. I have no doubt, however, that the outcome of the contest is important. I have found two or three sources of information to share with others on this blog.
Dodd-Frank included a modified version of the “Volker rule”, named for Paul Volker, former Fed chief. He successfully argued that the law should prohibit banks from accepting deposits from ordinary citizens and businesses and then engaging in proprietary trading (trading on its own account) and marketing of complex financial products like mortgage-based derivatives. Volker thinks that banks who want to engage in that kind of risky market activity should do so with their shareholders’ money, not depositors’ money. He also believes that, if taxpayers are bound to rescue a bank if it is in danger of becoming insolvent due to risky and reckless market activity, the bank should be prohibited from engaging in that activity.
The current argument about regulatory oversight of the banks concerns the “Volker rule”. The banks resist it because, if it is enforced, it will impede their ability to reap huge profits and enjoy obscene bonuses, secure in the knowledge that if their bets go bad, the taxpayers, not them, will suffer the loss.
One of the sources of complexity is that the banks have demanded an exception to the prohibition against “proprietary trading” to allow them to “make markets” for client issuers of new financial products like IPO’s and new stock or bond offerings. I don’t pretend to understand the various ways this “market making” function works, but here is what I have learned: When a company proposes to “go public” by offering its ownership as shares of stock in the publicly accessible stock market, the opening price for the stock is set by a brokerage house or a bank, acting as an underwriter. The underwriter typically agrees to buy the stock or bonds at a certain price, based on its hope that the market price will prove to be greater. If that happens, the underwriter makes a handsome profit. If not, the underwriter takes a loss. There are all sorts of variations on the terms of the agreement between underwriters and client-issuers but, in general, this, as I understand it, is the essence of them.
By insisting on retaining the right to act as underwriters, the banks have presented the drafters of the regulations with a conundrum: How to prohibit banks from doing proprietary trading, but allowing them to underwrite new issues of stocks and bonds. The banks would love to make the enforcement process so complex that they could always argue that they did not understand what is required of them.
A bottom-line principle of due process is that the government cannot punish anyone unless the wrong-doer knew, or reasonably should have known that what he was doing or failing to do was prohibited. A bottom-line principle of law enforcement is that unless violators go to jail, the whole thing is a joke. This is the kind of high-stakes game that is occurring.
Here are some links to some published articles that offer insights into the rules and progress of the current games. The Times published an article describing the inclusion of the Voker rule in Dodd-Frank. In another article, the Times describes how the banks are succeeding in breaking the ranks of the regulators concerning support for the Volker rule. Finally, here is Bloomberg News article disecting the banks’ arguments concerning the proposed regulations.
This effort to break the strangle hold the Wall Street banks have on our government, our politics and our economy reminds me of the struggle of Henry VIII to break the power of the Church in Rome over the English government. The Hollywood version is that Henry was merely motivated by his lust for Ann Boleyn but I think the contest was more substantive than that. Henry was dealing with the kind of powerful adversary we have on Wall Street: Well financed and able to command powerful allies. The contest was exemplified by Thomas More’s refusal to acknowledge the government’s right to control Church policies in England, a refusal that led to More’s martyrdom and canonization as a Catholic saint.
It seems to me that Obama, most of the Democrats and Volker, in the current drama, are analogous to Henry. The Wall Street bankers and their retainers in Congress are analogous to the Church. The outcome will determine whether America remains a democratic republic or a colony ruled by financial oligarchs. I am hopeful that a political version of the Reformation will occur, but the outcome does not seems certain to me.
BTW, I hope it is not necessary for me to add that, by making this analogy I am not, at all, implying any criticism of the Catholic Church. The above mentioned episode in English history is an interesting one. It reminds me of many political struggles in South Texas which I have observed: There was no “right side” or “wrong side”; there were merely different sides.
Finally, the current flailing about over complex regulations convinces me that the solution to our problems with the banks proposed by the authors of “13 Bankers” is likely the only one that will accomplish real relief and protection from repetition of the 2008 mess. The Wall Street financial behemoths must be broken into manageable pieces that can be allowed to fail without wrecking the lives of the rest of us.