Start the conversation
Let's talk about the so-called Volcker Rule.
When the Dodd-Frank Act was signed into law in 2010 – the bank-busting, save the system, "we'll never again have a financial meltdown that could destroy the world" legislation – it was more of an outline.
The ostensible idea, in the aftermath of the credit crisis, was to give regulators time to write sensible rules and not throw the baby out with the bathwater. Yeah right.
Of course, the real deal was about giving banks and financial services institutions time to fight every rule and regulation, from first drafts to final implementation.
Along the way, it was proposed that banks should spin off their risky businesses into separately capitalized companies, in the form of what an investment bank or a merchant bank used to be. That way they could play hard and fast. And if they failed, tough luck, you'd be on your own. Meantime, the sister bank would have Federal Deposit Insurance Corporation (FDIC) insurance to cover its depositors and make loans and do traditional bank things. Boring and stuffy bank things.
The Obama administration didn't go for that. President Obama, for all his bluster about bad banks needing a spanking, didn't go for that.
Obama advisor Paul Volcker – himself one the most revered and celebrated Federal Reserve Chairmen in the institution's 100-year history – wanted the separation of gun-slinging banks from insured depository institutions. He suggested banks stop proprietary (or "prop") trading altogether. (That's betting the house's money to make outsized gains to enrich the homeboys who are pulling leveraged levers for fun and profit.)
That suggestion became known as the Volcker Rule.
There's still no finished Volcker Rule. When I wrote about it 18 months ago, it was 300 pages long (see "Why the Volcker Rule Is a Cop-Out and a Joke"). There's now a 1,000-page draft circulating with all kinds of marks and bruises all over it. But it's not done, not nearly done. It's one rule.
Part of the problem is that banks and bank lobbyists and Congressmen in the banks' pockets are trying to stymie what they don't like, meaning the rule itself.
But the bigger problem is this: No fewer than five regulatory agencies are collaborating on the rule.
The Fed and the U.S. Securities and Exchange Commission (SEC) want to cut banks as wide a highway as they can, so banks aren't "hindered" from doing what they do that facilitates smooth-running capital markets. The U.S. Commodity Futures Trading Commission (CFTC) and the FDIC want to fill in the loopholes being written into the rule. The Office of the Comptroller of the Currency (OCC), they're clueless anyway, so they're just reading drafts over lunchtime martinis.
It all comes down to banks wanting to conduct "important functions" – such as market-making and hedging – without stupid restrictions. After all, market-making is not proprietary trading, they say, and hedging, well, that's hedging, they say.
Of course, that's all a load of BS. Here's what's really going on.
I was a market-maker (that's an official stamp) on the Floor of the Chicago Board Options Exchange. And I was the hedge trader for one of the world's biggest banks. Let me tell you what market-making is and what hedging is… really:
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.