Friday, December 7, 2018

Let's just speed up the next crash

A few double negatives buried in legislative text may have inadvertently freed nearly all U.S. banks from a regulation known as the Volcker Rule, which sought to curb risky behavior in response to the 2008 financial crisis.


Former Fed Chairman Paul Volcker had a fairly simple idea: curb excessive risk-taking by discouraging banks from engaging in activity designed to juice their corporate profits instead of helping clients and customers grow their money. The rule limits banks from using their accounts to do short-term proprietary trading of securities, derivatives, and commodities. The rule also limits banks from running hedge funds or private equity funds.

In practice, the rule was extremely difficult to implement. Even though it was signed into law in 2010, it took regulators five years to finalize and apply the regulations.


In the spring of 2018, a number of moderate Senate Democrats teamed up with Senate Banking Committee Chair Mike Crapo (R-Idaho) and the Republican majority to pass a package bill paring back portions of Dodd-Frank, arguing that some of the rules placed an undue burden on smaller financial institutions.

What could go wrong?
One of those provisions exempted smaller banks from the Volcker Rule. A summary of the bill promises “community bank relief” to banking entities that have “(1) less than $10 billion in total consolidated assets, and (2) total trading assets and trading liabilities that are not more than five percent of total consolidated assets.”

That would already exempt about 97% of the 5,473 U.S. banks and thrifts from the Volcker rule, S&P Global Market Intelligence reported in March.

The summary appears to communicate that a bank needs to meet both standards in order to get the exemption, but some larger banks are focused on a number of double negatives in the fully amended text that could cloud its interpretation.


[S]ources tell Yahoo Finance that some of the largest U.S. banks are now thinking about challenging the interpretation of that May legislation in court, arguing that the bill could be read as also extending regulatory relief to banks far above $10 billion in assets.


Doug Landy, a partner at Milbank, Tweed, Hadley & McCloy who formerly worked as a lawyer at the New York Fed, told Yahoo Finance that the negatives could be interpreted as flipping the “and” in the statute to an “or.”
Some years ago, my uncle, who was a District Court judge, tried to explain to me the legal problem with the common usage in couple's checking accounts of the and/or statement, and I didn't understand it then. So I'm not going to understand an and/or problem now, but the long and the short of it here is that big banks are going to take advantage of something that was allegedly intended for small banks. I say allegedly, because I don't trust Congress critters, and I wouldn't bet more than a nickel that this was intentional. Most of those assholes are lawyers themselves, after all.
[A] Yahoo Finance analysis of regulatory data on trading assets and liabilities estimates that nearly all U.S. banks above $50 billion would be free from the Volcker Rule under the “or” interpretation. The six largest banks — JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS), and Morgan Stanley (MS) — would all still be subject to the regulation because they have sizable holdings of trading assets and liabilities, meaning they meet neither condition for the Volcker exemption.


Oliver Ireland, former associate general counsel at the Fed, said he does not see the statute as having a “mistake or a loophole.” But Ireland, now senior counsel at Morrison & Foerster, said that if a bank were to take the statute’s interpretation to court, the legal question would concern the power of the regulatory agencies to interpret ambiguous language, a test known as the “Chevron deference.”

The largest banks that could benefit from the alternative interpretation are U.S. Bancorp (USB) and PNC Financial Services (PNC), both of which declined to comment for this article.


Congress could move to tighten the language through a technical corrections bill. But the Crapo bill’s drafters insist there’s no issue to begin with.

“Plain reading of the statute makes it pretty clear the cap is $10 billion,” a spokesperson for North Dakota Senator Heidi Heitkamp — one of the Democrats who helped broker the bill — told Yahoo Finance. “Both Republicans and Democrats agree on that.”
Yeah? Well, Heidi Heitkamp and none of the legislators involved are on the court benches where this shit will land.

...but hey, do what you will anyway.

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