Institute for Financial Transparency

Shining a light on the opaque corners of finance


Wall Street and the Volcker Rule

In a terrific article, Andrew Cockburn looks at how Wall Street influenced and still influences at both the legislative and regulatory level the evolution of the Volcker Rule prohibiting proprietary trading.

The article covers many of the themes in Transparency Games including Wall Street’s use of lobbyists to influence the legislation, subsequent regulation and its enforcement as well as the lucrative revolving door between those who write the rules and those who lobby against the rules.

Mr. Cockburn even discovers the potential for transparency to prevent a financial crisis.

The Volcker Rule was hardly the only component of Dodd–Frank to be undermined by semi-covert means. Over the past two years, the law professor and former regulator Michael Greenberger has been investigating another such maneuver, and an especially artful one. This was in connection with an effort to regulate swaps contracts, including credit default swaps—“the killer that caused the meltdown,” in Greenber­ger’s words—by requiring that the bulk of them be traded on public exchanges, with deals recorded in a database available to regulators. In the run-up to the crisis, for example, no one had understood that AIG was on the hook for bets it could not possibly pay. Had such information been public, the witless insurer’s rush to catastrophe might have been stopped.

One of the common refrains in my book is Dodd-Frank was written by the bank lobbyists for the big banks.  Having credit default swaps traded on public exchanges with deals recorded in a database available to regulators is Exhibit A.

At first blush, it appears to shine light on the credit default swap business.  But then you see how it actually protects the opacity of the credit default swap business.  The database isn’t available to everyone.  It is only available to the regulators.

As a result, it is only the regulators who could stop a witless insurer’s rush to catastrophe.  But are regulators really the one’s most likely to stop this activity or are the other market participants more likely to stop the activity?

My vote is on the other market participants.  They know in the absence of a bailout their positions might not be worth anything.

Regular readers know if banks disclosed their current exposure details, there would be no need for the Volcker Rule.  The transparency into each bank’s positions would be more than enough to end proprietary trading.