The Volcker Rule Just Arrived… Here Are the Two Worst Things About It

[Editor's Note: This inside look at the infamous Volcker Rule is one of Gilani's Wall Street Insights & Indictments columns this week. To get all of Gilani's insights as soon as they are released, click here.]

We've talked a lot about the so-called Volcker Rule. I've called it a "cop-out" and "joke" and tracked its bloated path from 300 pages to nearly 1,000.

Well, now it's here.

On Tuesday the rule was signed off on by the five regulatory bodies that will have to enforce it when it goes into effect in July 2015 (supposedly). And getting it done and approved was no small feat.

The Volcker Rule comes down to this: It stops banks and any other financial institutions that are backstopped by the U.S. Federal Reserve or the Federal Deposit Insurance Corporation (FDIC), generally speaking, taxpayers, from betting on their own behalf (proprietary or "prop" trading).

Don't get me wrong. I'm thrilled that the Volcker Rule passed. And I'll be thrilled when it goes into effect.

But everything is not as it seems.

Let me show you...

The Volcker Rule: Two Major Flaws

First, what's not thrilling is that the five regulatory horsemen (make that pack mules), who have their own agendas and their own masters, who are supposed to enforce the Volcker Rule, will all have to use their own judgment and interpretation of the rule succinctly laid out in almost a thousand pages.

Second, what else is not thrilling is that this ain't over 'til it's over. July 2015 is a line in the sand. The Fed can forward that to July 2016, or July 2017, if they want.

Whenever the start date is, it won't be before what's already started - the legal challenges and backdoor dilution efforts by some of our better-paid legislators in Congress, and the big banks and their lobbyists, have slashed and burned what's now on the table.

Here's the deal, really. There's no reason banks should have broker-dealer businesses. There's no cause for banks to be market-makers. The only hedging banks should be allowed to do is to hedge their loan portfolios and the government and municipal bonds they are allowed to invest in. Trading? Why should taxpayer-backed big banks even be in the trading business?

If they weren't, don't you think there'd be a lot more lending going on?

Now it's incumbent upon me, more often than not "The Indictor," to give a shout-out to an American hero who was instrumental in bringing the Volcker Rule front and center:

Thank you, Jamie Dimon.

Yesterday the JPMorgan Chase CEO said, "I'm glad that we now have certainty; I think we'll be able to manage with Volcker."

Thank you, Captain America, for your always unselfish efforts in promoting yourself as the most prudent bank manager in history, having guided your bank so successfully through the 2008 financial crisis with only a few hundred billion dollars of help. Thank you for initially bashing the proposed Volcker Rule, then so generously losing more than $6 billion (you and I both know it was way more that) and lying through your teeth that it was a hedge position the London Whale was executing that went wrong. If you had admitted it was greed and not a hedge position, we might never have gotten the Volcker Rule. But now, thanks to you, the rule addresses how "hedging" can be a smoke screen for unbridled lying, cheating, thieving, and greedmongering. Thank you, I love you, man!

As far as additional thanks, I want to thank the Federal Reserve and the U.S. Securities and Exchange Commission and the Office of the Comptroller of the Currency and the FDIC and the U.S. Commodity Futures Trading Commission for making the Rule just 71 pages long, with only an 882-page "preamble." At least there's no room in there for interpretation. Oh, and all the lawyers on Wall Street and K Street want to thank all of you, too, for creating thousands of billable hours finding and exploiting loopholes.

But, I'm sorry, I don't know who to thank for watering down the "certification" requirement that makes CEOs sign off on compliance. It was harshly proposed that CEOs certify their wards are in compliance with the rules. But now they'll only have to certify that they have compliance procedures in place, that they have made an effort to follow the rules.

That's a relief for all of us.

After all, look how many CEOs - who have to sign off on their financials, and how honest they are, under the oppressive and rigorously enforced Sarbanes-Oxley laws - have gone to jail for lying about their institutions' financial numbers and true condition. Heaven forbid another law like S-O fills America's jails as it has with criminals. The total count has already surpassed two or three jailbirds (long live the folks from Enron).

Okay, okay, sorry for all the sarcasm.

But this whole thing is a joke to me. The inordinate and frightening rise of financial services behemoths has tilted America onto its side - the side that's run by bank officers and money-mad oligarchs.

For God's sake and America's, we have to break up the big banks and separate lending from investment banking and trading. But it will be no little feat.

Next, Shah Gilani on the latest derivatives dust-up (you won't believe this is actually legal): How the Masters of the Financial Universe Use Derivatives for Fun and Profit

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.

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