Subject: File No. S7-41-11
From: Jason Bright, Mr.
Affiliation: Law Student - University of MIssouri

October 24, 2011

Volcker Rule: Triumphant Return to Glass-Stegall or Flawed Band Aid?


The Volcker Rule is part of the Dodd Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule seeks to limit proprietary trading by commercial banks. In simplified terms, it limits a banks ability to make speculative investments with its own personal accounts. Prior to Dodd-Frank, the banking industry was regulated by the Glass-Stegall Act which was enacted in 1933. In 1999 the Gramm-Leach-Bliley Act repealed the provisions that prohibited bank holding companies from owning other financial companies. This repeal led to the development of so called superbanks that meshed the worlds of consumer banking and investment banking. The most recent financial crisis and subsequent bail outs were tied directly to these superbanks that were deemed too big to fail. The current legislation under review is congress reaction to this current dilemma.

Anti-reform analysis:
The Gramm-Leach-Bliley Act was designed to let banks take advantage of the booming economic market, pump money into the economy, and create wealth generating opportunities. The financial repercussions of the Volcker Rule could mean a dramatic realignment of the economy. It would take millions of dollars out of the economy and force commercial banks to find other ways to make a profit. At a fragile time in history for the U.S. economy, a reduction in investment dollars could hurt our position in the global economy and force the country into an even worse recession. Additionally, in order to recoup the profits lost by investments, banks will find additional ways to seek profits from its consumers, thus further restricting the wealth of the common American. If banks fall short in recouping these profits by conventional means, such as additional fees, it could entice them to engage the very same questionable lending practices that led to the current housing crisis.
Although an unpopular argument, one must consider the fairness of this reform on the banks. Starting in 1999, in response to the Gramm-Leach-Bliley Act, banks systematically started investing in and consolidating their services to meet consumer demand. Now, due to no fault of their own, they are being forced to dismantle these services into separate entities under separate holding companies. This beacons a substantive due process argument. The government effectively forced banks to restructure to remain competitive in an ever changing deregulated market and is now punishing them by forcing them to diverge. The new regulation will again force banks to invest heavily to comply with the Volcker Rule. Banks will not only need to pay for the restructuring of their corporations, but will also need to pay to regulate themselves and prove they are in compliance with the new legislation. It will also force many Americans in the banking industry to be displaced. By limiting the banking industrys ability to make money, and then forcing them to pay to self-regulate we are placing an undue financial burden on an already struggling system.

Pro-reform Analysis:
The Volcker Rule marks a return to a system that served the economy well from 1933 through 1999. Absent the natural cyclical fluctuation of economic prosperity and realignment, this period marked a time of general stability and prosperity for the United States as a country. Changing times and persistent advocates eventually pressured Congress to modify the Glass-Stegall Act. In ten short years we have seen two great recessions in 2001 and in the current crisis. While other world events must be considered, this fact alone points toward the need for a correction of the current system. A recent study shows that the current financial crises whipped out the past four and a half years of profits gained by proprietary trading suggesting it leads to faster and more dramatic economic cycles.
By financially insuring the banks we are effectively letting them gamble with consumer funds with little to no risk. If banks lose funds being used to secure consumer loans they jeopardize the financial stability of the institution on a fundamental level. However, they know that FDIC insurance will repay any loses they might sustain where it relates to consumer funds. The major concern comes from leveraged investments. If leveraged investments go bad the banks stand to lose more than just their capital. Who will come in to secure those loses? By removing this possibility, the government is reassuring consumers that their money is safe again. Additionally, this reform may be coming at just the right time. Many financial experts are predicting the potential for a second housing bubble. By separating consumer banks from investment banks it might insulate them from some of the more severe consequences. Consumer banks will be forced to sell off many of these sub-prime mortgage backed securities and could avoid the potential losses associated with them. Limiting the exposure of banks to volatile investments will make them stronger in the long term and re-instill faith in consumer banks.

Lingering Questions:
They key to effective deterrence is immediacy and certainty. The problem with the Volcker Rule is that it lacks both. None of the restrictions will take full effect until 2014 and some exceptions could be made until 2022 or beyond. Furthermore, no one really knows what the lasting effect of the Volcker Rule will be. Is this just a temporary fix? Will it stand the test of time like the Glass-Stegall act or will it diminish quickly like the Gramm-Leach-Bliley Act? Some argue that the teeth behind this reform have already been compromised. Others suggest that the extended time line is a mechanism to let the market slowly correct itself before being dramatically affected again by this reform. It is un-doubtable that some change must happen, but the real question for me is this: Is the Volcker Rule a lasting, long term solution or just a band aid quickly applied to stop a bleeding economy?