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Yglesiocracy
November 16, 2011, 11:19 am
Filed under: Uncategorized

Paul Volcker says Volcker rule too complicated

Well, I could have told you that.

But really, I don’t know what he’s complaining about. In Smart regulation, complication is a feature not a bug. The complication of the Volcker Rule means that anyone falling under its umbrella will need an army of lawyers, “consultants”, CFAs, and IT/database gurus to even begin to cobble together some sort of conclusion as to whether they’re compliant with the Volcker Rule or in massive violation of it. Meanwhile, on the government side, to check (rather, pretend to check) compliance with the Volcker Rule and fine unpopular/non-regime-friendly market actors random gigantic amounts from time to time, the government will have to assign a parallel army of government schmoes to try to sort through all the reports and data collection, to make asinine requests for irrelevant information, to make site visits to ensure everyone clicks their heels and falls into line and serves them muffins, and so on.

This is win-win. Tons of sinecure jobs pushing papers and collating numbers for the otherwise-useless overdegreed (such as myself) and for Smart People bureaucrats. All at the American mortgage-borrower & taxpayer expense.

This is what happens when it becomes conventional wisdom among Smart People that something that can’t be defined (‘prop trading’) should be banned. And make no mistake. The people you see posting on their Facebook walls that ‘it’s great, it’s about time they banned prop trading, I just hope the banks don’t water it down’ are talking out of their butts. There is no coherent definition of ‘prop trading’. There is no sharp line you can ever draw between ‘prop trading’ and other (the good kind of?) trading. So, any effort to ban ‘prop trading’ via some sort of enforceable, clear regulation would have turned out like the spiderweb mess we are apparently getting.

Of course, Volcker is claiming he wanted a much simpler, vaguer rule. This is what you’d expect him to say as a Smart Person, in accordance with the basic principle of Yglesiocracy:

Just make the law completely vague, like: ‘No doing bad stuff!’. Let us handle the rest; we’ll go ahead and run with it from there.

This is because Smart People have no use for the concept of the Rule of Law. Smart People favor the rule of Smart People.

One final interesting note here is the extent to which our government now is at the beck and call of certain anointed gurus. The article concludes with this statement:

“It reinforces the point – I don’t want the banks doing the kinds of things they were doing,” he said.

I find this rather interesting. It’s nice and all that Paul Volcker ‘doesn’t want’ ‘the banks’ doing this and that. And he’s entitled to his opinion and all. But may I ask a question? Who cares with Paul Volcker thinks about anything, what he ‘wants’ and ‘doesn’t want’? Paul Volcker is not a member of the U.S. government. He is not even part of the Federal Reserve anymore. He sat on some non-governmental committee for Obama a while ago, which I guess is how he got into this conversation. But literally, Paul Volcker is a private citizen. Yet this article is treating his opinion about which regulations should and shouldn’t be in place as divine revelation.

And it may as well be. Because the fact is, the people we do elect to make our regulations, don’t know jack squat about the things they are regulating. This is how we end up with ‘Volcker Rules’ and then retardedly turning to Volcker (his name is on the ‘rule’ after all! he must know!) to explain to us the rule he ‘wanted’. Truly, we are living in a Yglesiocracy.

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This isn’t complicated. Banks realized they could take huge punts on asset prices and if they were wrong taxpayers paid. Unless you are going to disallow bailouts, then you need a law saying you can’t take huge punts on things.

Comment by Dave

Banks realized they could take huge punts on asset prices and if they were wrong taxpayers paid.

I would disagree that banks somehow ‘realized’ this while they were establishing positions (as opposed to, ‘tried to get bailouts after the fact’). That is, until the concept of ‘too big to fail’ was established – because the government chose to bail out someone.

Unless you are going to disallow bailouts, then you need a law saying you can’t take huge punts on things.

What’s a ‘huge punt’? Sure, you can try to define this, but you end up with gobbledygook that will require an army of useless paper pushers to monitor/enforce. And it will inevitably be game-able anyway.

In any event, I would choose option (a). Disallow bailouts. The fact that Congress is stupid/corrupt enough to engage in bailouts is not a good argument for further stupid/corrupt practices.

Comment by Sonic Charmer

“I would disagree that banks somehow ‘realized’ this while they were establishing positions”

Yeah, I’m pretty sure that LTCM thought they were taking a huge punt on Russian bonds. And that Enron knew they were taking a huge punt on energy prices. And that AIGFP knew they were taking a huge punt on mortgages.

“That is, until the concept of ‘too big to fail’ was established”

Anyone that has been paying attention knows that TBTF was established a long time ago. We’ve had bailouts for decades now. You may not like it, but its an inherit part of the economic and political system we’ve built. If it was ever going to be tested it was when 90% of the country opposed TARP and it passed anyway. That proves bailouts will always be with us.

“What’s a ‘huge punt’? Sure, you can try to define this, but you end up with gobbledygook that will require an army of useless paper pushers to monitor/enforce. And it will inevitably be game-able anyway.”

What AIGFP did was a huge punt. So was LTCM. So was Enron. So was that John Corzine just did. Christ man, we practically have a new blow up every few months with this shit. Let’s stop pretending it doesn’t exist.

We managed to regulate banks pretty decently for decades after the depression, you’d think we could do a better job today.

Comment by davver

I’m confused. By my count precisely 0/4 of LTCM, Enron, AIGFP, and MF Global are/were banks, and so I am not sure any of them would have been subject to the ‘Volcker Rule’ I thought we were talking about. Those precedents say little about the nature of huge punts (hedge funds are supposed to take risk!) or the alleged need for more/better banking regulation designed to prevent banks from taking ‘huge punts’. Try again.

Comment by Sonic Charmer

Ultimately, banks lent these guys the money to make their huge punts. And many of them relied on their huge punts as part of their “hedging” (see GS and AIG). If you lend to someone taking a huge punt, you are taking a huge punt. If your on the other side of a huge punt you are taking a huge punt.

Or in the case of Bear/Lehmen you have the banks taking the risk themselves.

Comment by davver

Re: banks lending hedge funds money to take punts (i.e. giving them leverage), while that may be true, it isn’t covered/prohibited/proscribed/affected by the Volcker Rule nor any other proposal on the table. So again I’m confused as to how you think that works as part of the argument I thought you were trying to make.

Likewise, while it is true that e.g. Goldman’s ‘hedging’ came with unacknowledged AIG counterparty risk, and this mean the government effectively bailed out Goldman (by making AIG’s collateral calls), as I said I don’t think the government should have done that. The fact that the government did something misguided is – again – not an argument for doing further misguided things. But even if you think it is, something like Goldman-AIG still has nothing to do with and would not have been prevented by the Volcker Rule or anything of the sort.

As for ‘the case of Lehman/Bear’, the government did not bail out Lehman. So the dots I’m supposed to connect between ‘Lehman blew up and the government didn’t bail them out…therefore we need a Volcker Rule’ are manifestly unclear to me. Now, the government did in effect bail out Bear, but (again) I don’t think they should have. So in any event if ‘the case of Lehman/Bear’ is supposed to somehow illustrate that we can’t not-bail-out these actors, it just doesn’t work. The government bailed out one and not the other; my answer is I think it should have bailed out neither.

best

Comment by Sonic Charmer

I don’t think the government should bail people out either, but we don’t make policy and never will. There are a lot of things that are good in a technocratic, academic, or philosophical sense, but simply don’t have adequate political economy. If we couldn’t stop TARP then, we will never stop TARP. And even if we did, the Federal Reserve has shown that it will fill the role of bailout provider regardless of the authority of its mandate or constitutionality (and our politicians showed they are ok with this by reappointing Bernanke). Given how long bailouts are going on, and the deep seated support the have in our politics irregardless of public opinion, I think we have to take bailouts as a given.

I don’t know the extent of the Volcker rule. Maybe it should extend to lending hedge funds money to lever up. I do know its part of a push to limit the risks that banks backed by the government (pretty much all of them) can take. That’s a good thing. The purpose of the banking system is to turn savings into investment, not gamble with taxpayer money.

If your argument is that the Volcker rule doesn’t go far enough, or should be changed in some way, maybe your right. I’m not hear to argue about the intricacies of the law. I’m hear to disagree with the overall idea that banks should be allowed to take whatever risks they want and fuck trying to regulate those risks. As a defense you throw out the idea that we just won’t bail out banks anymore, which sounds nice but both you and I know that is never going to happen.

The Great Depression gave us WWII. The Lost Decades in Japan didn’t change the power structure there all that much. Politicians will always choose elongated less sudden pain over status quo threatening short term pain, and so will the powerful interests who influence them will as well. Maybe that’s not the right way to do things, but its the way the actual world works. Policy prescriptions that don’t consider the political economy constraints of a nation are worthless.

Comment by davver


I don’t know the extent of the Volcker rule. Maybe it should extend to lending hedge funds money to lever up.

The Volcker Rule is meant to ban ‘prop trading’. There may be an argument that the relationship between banks and hedge funds ought to be more regulated, but (1) I’m not sure what reason there is to think that *this* per se is a problem, and (2) in any event such an argument would not belong in a discussion of the Volcker Rule, which is just not about that.


I do know its part of a push to limit the risks that banks backed by the government (pretty much all of them) can take. That’s a good thing.

As I said, you’re making the argument that (1) bank risk should be regulated (for some reason you think that hedge-fund bankruptcies like LTCM and MF Global illustrate this!?), (2) the Volcker Rule (whatever it is) is meant to limit risk, therefore (3) what’s my problem. Again, this is not a real argument. A non sequitur at best.

I’m not hear to argue about the intricacies of the law.

Ok then.

I’m hear to disagree with the overall idea that banks should be allowed to take whatever risks they want and fuck trying to regulate those risks.

I don’t know who you think was putting forth this idea you’re here to disagree with. Not me. No one is proposing that banks ‘be allowed to take whatever risks they want and fuck trying to regulate those risks’. In reality, that horse has left the barn: I am here to tell you firsthand that banks are probably the most fascistically-regulated entities on earth. An informed discussion would proceed by acknowledging this fact as its starting point, not by pretending that someone is proposing to do away with ‘trying to regulate’ altogether.

Comment by Sonic Charmer

Just to save time:

The tenor of all your comments is (1) Bad Stuff Has Happened In The Area Of Financial Stuff, (2) therefore we must have needed some sort of more regulation, (3) the Volcker Rule is a regulation, so (4) I shouldn’t argue with it.

I’ll just note here that any argument of this form is a non sequitur.

Comment by Sonic Charmer

“banks are probably the most fascistically-regulated entities on earth.”

If this is true why did two giant ones go bankrupt and why were they able to lend money to hedgies running punt trades so they could leverage 30, 40, or 100 to one (a banks risks is based on who they lend too, they might as well be taking the punt themselves).

Look, I’ve dealt with some annoying regulations in my day, but to say banks haven’t gotten away with an incredible amount of harmful shit is ridiculous. I’ve worked on a trading floor at an i-bank, we could get away with any shit we wanted. I know your some regulation hating libertarian or whatever, maybe your a finance guy and can’t handle just accepting that your evil, but those are your personal hang ups, not a reflection of reality.

Comment by davver

[fascistic regulation] If this is true why did two giant ones go bankrupt

You seem to think ‘having lots of regulation’ and ‘banks go bankrupt’ are mutually exclusive. I do not. If it helps you understand my point: ‘lots of regulation’ and ‘good/useful regulation’ are not the same thing.

and why were they able to lend money to hedgies running punt trades so they could leverage 30, 40, or 100 to one

It seems as though you’re telling a story of the financial crisis in which the reason (some?) banks failed is they lent money to hedgies. Do you have specific cases in mind because this is not a story I recognize. Generally, I would not say that [banks giving leverage to hedge funds] per se was a huge contributor to the crisis. You seem to have picked up this one tiny ball and run with it, but in my book this hedge fund thing is beside the point and wasn’t really even the problem.

to say banks haven’t gotten away with an incredible amount of harmful shit is ridiculous.

Do you or do you not understand that whether banks ‘get away with’ lots of shit and whether they are over- and wrongly-regulated are separate issues. If you like, you can just read my criticisms here as saying that the regulations that have been and continue to be increasingly put in place, are in the wrong direction and do not help and therefore that better ones (not stupid-ass ones like the Volcker Rule) are what should be put in place.

I consider the fact that banks failed (in the face of – again – a gigantic mountain of regulation) as evidence for not against my thesis.

I know your some regulation hating libertarian or whatever, maybe your a finance guy and can’t handle just accepting that your evil, but those are your personal hang ups

That was a tremendously constructive and intellectually-stimulating argument. “I’m evil.” Touche. How can I possibly argue with that. Kudos to you sir, you have blown me away with the force of your logic.

Comment by Sonic Charmer

There are all sorts of things that caused the financial crisis. We should address all of them. One of them is that banks engage in prop trading, often highly levered trading with large positions, that can go negative and wipe out their capital. The proposed legislation is to limit this. It seems to me the difference is pretty straight forward, considering my floor had trading desks (where everyone’s goal was to have net zero risk at the end of the day and their risk levels were closely monitored) and prop desks (where their goal was to make money by taking risk for the firm, often dangerous risks). Trading is a necessary evil of having markets, and markets are necessary to match savings with real investment. But prop trading isn’t necessary to anything, its just a way for a bank to make money for itself while using the government as a backstop.

If there its hard to tell prop trading from market trading (it isn’t, they happen on two different desks and there are ways to tell, but I digress) then just ban it. Ban anything that doesn’t pass a strict test. You know why? Because what wall street does isn’t valuable. You’re approaching this from the view that wall street adds value, and if regulators get in the way value won’t be created. However, I don’t think any of the changes to the street over the past two decades added any value. I sure as hell wasn’t helping create real investment when I invented derivatives and sold them to chumps.

That’s the fundamental difference here. If banks decided to stop taking risk on their books because of regulation, great. Nobody will miss them. If regulations get so difficult banks don’t want to engage in prop trading anymore, good! I’m A-OK with going back to the days were banking was boring and people focused on simple products, made their money on spreads, trading was lighter, and people focused on real investment rather then gambling. If that means 80% of what wall street does goes away because regulation made it too difficult that’s great.

Your reply that they could get around this by lending money to non banks to take risk for them, or that they could balance their books by taking on counter party risks of dubious natures with non banks, only illustrates the point for greater regulation. Its like you pointed out that the walls of a prison aren’t high enough, so your solution is to get rid of the walls. My solution is to make the walls higher. If the inmates don’t like it, tough. They don’t add any value to society, we want to keep them from making trouble.

Your position on the matter is driven by personal needs. You want to feel like bankers add value, because the alternative is to admit to being a shiftless conman. So when people try to get in your way you scream about how difficult it makes your job, not realizing your job is worthless or even harmful. I’ve seen enough of this on the street to know the type. How I guy can spend an entire morning hawking junk financial products he knows are worthless to clients and then complain about how regulators are stopping him from adding value is amazing.

Comment by davver

Golly. Your biographical description of me and my personal motivations for holding the opinions I hold, based on no knowledge whatsoever on your part, is so astute that it’s scary, and sent chills down my spine. Like looking into a mirror – a dark, twisted mirror and I do not like what I see, no sir. You, through your highly accurate internet diagnosis, have made me realize the empty blackness at the pit of my soul, and that I need to change my ways and indeed my entire life (which you clearly know so much about) immediately. Which is an unpleasant truth, to be sure, but in fact I should be getting down on my knees and thanking you for in your supreme wisdom showing that truth to me and giving me a chance to turn my life around.

But seriously….

If you think identifying prop trading is a simple matter of looking at which desks are formally called ‘prop desks’, we have crossed wavelengths. If it were that simple, who would need a Volcker Rule, let alone one whose definition of prop trading needs a 30+ slide summary with flowcharts? Just ban having ‘prop desks’. Simple! “Gee, regulators, just look at our org chart: we have no Prop Desks.”

You say “The proposed legislation is to limit this” (despite by your own admission not knowing anything about the actual regulation you’re pretending to construct, but haven’t yet actually constructed, an argument in defense of). I would respond that you appear to have omitted the word “intended” between “is” and “to”. If you don’t realize it makes a crucial difference then again, we have crossed wavelengths because one of the primary points I’m making is that it does.

The prison analogy you bring up is an interesting one. I tend to agree that the prevalent regulatory mindset is sort of like building a prison – only, it’s a hugely complicated prison, with Escherian geometries, endless labyrinths, walls that grow and move as if alive, and that needs constant patching, reworking, repair, rerouting, and (manpower-intensive) maintenance. What I am suggesting is that this is not the best way to go about things. In particular, many of the ‘inmates’ don’t need to be ‘imprisoned’ in the first place (a good analogy here is to the drug war).

Do you sincerely disagree with this? Did you even take a look at the Davis-Polk summary of the Volcker Rule I linked to? (Here is the link: http://www.volckerrule.com/proprietary/prop_files/gif_1.htm) If not, then why are you expending so much energy rising to its defense from a position of complete ignorance about it? If so, then what is your actual defense of it, on its merits (i.e. not in the generalities you’ve been spouting that basically just boil down to ‘more regulation = good’)?

And p.s. if you’d like to continue discussion that’s great but there’s just no need for all the quasi-biographical mind-reading. I think if you knew me you’d realize how hilarious and off the mark your guesswork about me really is, but that’s beside the point in a rational discussion anyway. Let me know if/when you’d like to try to have one.

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Comment by Sonic Charmer

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