The Volcker Rule, named after former Federal Reserve Chairman, Paul Volcker, is one of the centerpieces of Barack Obama’s overhaul of Wall Street regulation.
The Volcker Rule is a section of the Dodd–Frank Wall Street reform, which attempts to stop banks from proprietary trading, when bank deposits are used to trade on the bank's personal accounts. The rule is supposed to begin later this year, but its effects are already being felt on Wall Street.
Many analysts and traders at "prop desks" as they are popularly called, are already being laid off. Additionally, the banks are finding a way of getting around the rules, even before the law officially takes effect.
Banks have started to collateralize mortgage-backed securities (MBS) again.
During 2007 and 2008, banks were stuck with these securities and unable to sell them as the market for buyers froze. The only mortgage-backed securities that banks and investors wanted were the ones that the U.S. government backed, like Fannie Mae and Freddie Mac.
However, Credit Suisse recently stated that they have begun selling non-government backed mortgage bonds to investors.
The difference between the (MBS), which Credit Suisse sold recently, and the ones that banks sold before the housing bubble burst, is the manner in which the transaction was conducted. Credit Suisse set up the buyers and seller of the mortgage securities beforehand, so that the bank doesn’t have to hold onto the securities.
This prevented a repeat of how many banks lost lots of money in 2008 as the banks were stuck with bad MBS on their balance sheets. Credit Suisse has shown that there is now a legal manner to evade the Volcker Rule!
When banks face new regulation, they always find little loopholes and ways to get around the regulation legally. Now that Credit Suisse has shown how to do it, watch as other banks quickly follow in their footsteps.
As mentioned above, the Volcker Rule was one of the main ideas behind President Barack Obama’s financial overhaul.
Many banks complained that the rules would increase costs and lobbied against the legislation. So far, the only effect seems to have been that many people have been put out of work because of this rule, and it has raised costs for banks.
This isn't to say that there should be no regulation. However, it must be done in a careful and wise manner, instead of signing a bill no one has read.
When it comes to Wall Street officials, they always are a step ahead of regulators.
Next time President Obama thinks about major legislation, he should actually listen to the industry, before making large changes, which do nothing to solve the original problem.
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