Under the leadership of the Trump Administration, financial regulators rewrote the regulations enforcing the Volcker Rule.  The reason given for this action was

the changes are a victory for the financial services industry, which has long complained that complying with the rule took up too much of their time and money.

Jelena McWilliams, the chair of the Federal Deposit Insurance Corporation, one of the regulators in charge of implementing the Volcker rule, said that distinguishing between what qualifies as proprietary trading and what does not has proven to be extremely difficult.

“Banks that do relatively little trading are required to go through substantial compliance exercises to ensure that activities that have long been considered banking activities do not run afoul of the Volcker rule,” she said.

Regular readers know I too thought the Volcker Rule regulations should be rewritten.  Since Paul Volcker first proposed the rule, I have argued the enforcement regulations should take two paragraphs.  Paragraph 1 would say banks are not permitted to take proprietary bets.  Paragraph 2 would say banks must disclose their exposure details at the end of each business day to show they are not violating Paragraph 1.

Not only could the regulators use the disclosed information to determine compliance, but so too could the market.  And the market includes people like Paul Volcker who observed when proposing the regulation that “he knows a proprietary bet when he sees it”.

Of course, the disclosure would end the Too Big to Fail banks taking proprietary bets.  Their traders understand other market participants would see what they were betting on and then take positions that would minimize the value of their bets.  [In case you doubt me on this, the London Whale specifically talked to JP Morgan’s senior management about his concern other investors would figure out his position and then trade against him.]

Of course, the Trump Administration did not follow my suggested rewrite of the Volcker Rule regulations.  Instead, it followed Wall Street’s.

As a result, the opaque Too Big to Fail banks are free to engage in proprietary betting again.