The Volcker Rule is a new piece of regulation (71 pages long) that prohibits banks from making risky bets, termed “proprietary trading” on Wall Street.
In The Nation, I highlighted parts of the rule in an article called “The Volcker Rule: Wins, Losses and Toss-ups.” But for the TL;DR set, here’s some of my article, summarized in Cat Photos.
One concern is that regulators are allowing banks to write their own policies & procedures to ensure there is no more prop trading. If these aren’t watched carefully by regulators, it seems there is much potential for mischief, rule-dodging, and disguising:
Another problem with the final rule is that it treats carried interest totally different than the tax code treats it.
From The Nation:
“Private equity fund managers are often paid through ‘carried interest,’ which allows a manager to share in the profits made by the fund.”
Carried interest is taxes at a far lower rate than regular income made through salaries and wages–making this an egregious loophole for wealthy fund manager.
The argument wealthy fund managers make for why this tax treatment makes sense is, hey! Carried interest is ownership! But guess what? In the Volcker Rule, carried interest is NOT considered an ownership interest!
That sounds like reason enough to get Congress to stop the preferential tax treatment of carried interest.
“If the five regulators that wrote Volcker can all agree that carried interest is not an ownership interest, certainly Congress should be able to change the way the tax code treats this kind of compensation. If they don’t, the banks get to have their loophole and pay ultra-low taxes on it, too.” (The Nation)
Another part of the rule that could be weak, is one that is meant to prevent banks from trading with each other (which they used to do all the time, in order to gamble), and just call it “Market Making.”
From The Nation:
“consider other megabanks 'clients’ for the purposes of market-making (when the other bank has $50 billion or more in trading assets and liabilities). This is important because megabanks typically only trade with each other for two reasons: to hedge, or to proprietary trade. Goldman Sachs is a competitor, not a client, of Morgan Stanley, so this clarification makes good sense. Unfortunately, there are two exceptions.”
It will be important for regulators to (1) closely monitor any document exceptions and (2) clarify what “anonymously” means here, to ensure this new restriction on trading between banks isn’t completely subverted.
For more wins, losses and toss-ups in the Volcker Rule, please see my article.