Banks, Wall Street Arrogance: Alive & Kicking

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Banks, Wall Street and Volcker Rule

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For those who thought the Volcker Rule would be the saving grace for Wall Street, it’s clear it’s anything but. The Volcker Rule, a specific section of the Dodd–Frank Wall Street Reform and Consumer Protection Act, was written to protect the American financial sector by preventing speculative investments by banks that had no benefits for the consumers. The argument was that due to a lack of regulations, certain banks contributed greatly to the economic problems that eventually led to the recession in 2008. The rule puts a ban on trading by commercial banks that seek to line their own accounts such as hedge fund investing and those sometimes-confusing private equities. In short, the law forced banks to put the consumer first instead of their own directors and CEOs. These regulations were hotly debated to the point that an extension of time was required before the rules went into effect. That date was July 21, 2012. Now, months later, not only have the rules not been put in place, but there has been no clarification whatsoever and as a result, some banks are free to carry on business as usual. And it’s causing big concerns.

Bank Arrogance

The arrogance of some banks has become clear. Because the Volcker Rule has been weighted down under enormous resistance, the very institutes it was to affect have all but dismissed it. The head honchos at Goldman Sachs are prime examples of that arrogant entitled mindset. Remember, it’s been more than two years since this was passed as law and it’s clear no one is taking it seriously.

Here’s what many don’t know. Because all of these regulations were being written shortly after Obama took office and during the devastating mortgage crisis and recession, many consumers weren’t paying attention to the confusing financial laws. The entire Dodd Frank Act was controversial (as it is today) and the Volcker Rule was mostly a last minute addition that was supposed to cover loopholes and serve as a safeguard. Congress passed it, but not before bleeding all over it and basically removing the substance of the intent. The two year waiting period that would allow regulators, politicians and bank officials to provide feedback began. That was July 2010 and today, folks are still waiting to understand a law that’s already in place. No one can summarize it, no one can make sense of it – including its authors – and it’s proven to be an embarrassing truth about this nation’s leaders. It’s a law no one can follow. It’s a law that simply has yet to be defined.

Some Ahead of the Game

There were some entities that figured it’s best to get a head start and begin putting new safeguards in place; however, those efforts were mostly short lived and had little – if any – effect. Bank of America put forth a solid effort as did Barclays. Unfortunately, they, and a few others, moved forward unsure of what they were doing, but confident it would all play out as the deadline loomed.

Goldman Sachs

And then there was Goldman Sachs. It paid no attention to the law then and certainly not now. Instead, it’s greedily gobbled up as many commitments and investments as it possibly can in an effort to cover the bases before the law went into effect. Remember, it’s already gained $9 billion in commitments from both the bank as an entity and its employees. It’s an obvious snub to Volcker. Further, there’s a new energy fund and real estate investment that is also illegal, but because no one understands Volcker, no one can enforce it.

So what is its long term strategy? Apparently, it’s going to cite ignorance if those latest efforts are deemed illegal. When that doesn’t work, it will likely request extensions, which shouldn’t be too difficult as there are so many potential time consuming impacts that it could realistically drag out for another decade. Goldman opted to delay divesting its various interests in a few of these funds with the certainty that it can hone in on those extensions and use them to their advantage when and if the time comes. But there’s more.

Profiting

It now appears as though not only has Goldman Sachs thumbed its nose to the obvious and clear aspects of these laws, but it’s also profiting in ways its competition can’t or won’t because of their own commitment to remaining in compliance. Many banks know that despite the inconsistencies, there are legitimate and hardlined regulations in these rules. Goldman Sachs is prepared to play the “I didn’t know that” game. One analyst puts it this way,

Its earnings are probably amplified because rising public equity values over the past two years have led to a particularly strong exit environment for private equity.

There are literally thousands of comments that have been dumped into this aspect of the finalization efforts and once those comments from Wall Street have been addressed, there still must be a public comment timeframe as well. Some are suggesting it could be 2024 or later before it fully goes into law. The banks alone are playing hard ball – they’re prepared for a long and drawn out battle to ensure the impacts to their businesses are limited. In fact, the Securities and Exchange Commission (SEC) received more than 16,000 comments regarding this new rule. And let’s face it – the only common denominator with lawmakers on Capitol Hill is the shared belief that procrastination is a fine quality to possess.

The Volcker rule began with a focus on righting the wrongs on Wall Street. Its purpose was to ensure transparency, honesty and integrity in the banking industry. The only purpose it’s served is to spotlight the determination of some bankers and Wall Streeters to bypass anything unpleasant that could affect their own personal net worth. And make no mistake – this nation’s biggest banks have been scrappy in their vehement disapproval. This law is by far the most controversial law in recent history and it is the one law bankers have lobbied against since its inception. And if you’re wondering, Wells Fargo leads the pack.

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About Author

David is a CPA and has spent the past decade as a financial adviser helping clients meet their fiscal objectives. With an appreciation for journalism, he has spent the past few years overseeing several financial columns as well as writing two previous finance blogs. He resides on the East Coast with his wife and two sons and has guided many through the recent recession while providing a no-nonsense approach to spending and saving.

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