Keep Your Expectations for the Volcker Rule Low
A certain amount of fatalism always seems to creep in whenever the government promises a new fix for something perceived to be ailing the financial system and capital markets. Back in 2002, when Congress passed the Sarbanes-Oxley Act, the big problem was the auditing profession, which had been exposed as an oxymoron by Enron Corp. and other corporate frauds. Today the hot topic is the banking industry and the matter of proprietary trading, the definition of which is evolving.
After Sarbanes-Oxley was adopted, the Securities and Exchange Commission and a new regulator, the Public Company Accounting Oversight Board, passed a bunch of rules on everything from new audit reports on companies' internal accounting controls to new restrictions on the types of nonaudit services that firms could sell to audit clients. It would be hard to make the case today that audit quality has improved.
The Big Four accounting firms have expanded their consulting practices, not shrunk them. Reports on internal-control audits aren't worth much, as we learned from the collapse of MF Global Holdings Ltd., which was audited by PricewaterhouseCoopers LLP. Audits of companies’ financial statements are widely considered by investors to be irrelevant, as the accounting oversight board's chairman, Jim Doty, acknowledged in a speech yesterday. They just don't add much value, although this is something that the accounting board (yet again) is promising to change.
Now comes the Volcker rule from the SEC and four other federal regulatory agencies, acting in response to instructions by Congress in the Dodd-Frank Act. (That would be the 2010 law that promised to end too-big-to-fail and didn't.) The Volcker rule promises to end proprietary trading by federally insured banks, except in those instances when it doesn't. And there's some merit to having a ban: Lots of people dislike the idea of banks gambling with federally insured customer deposits, because they might blow themselves up and either cause damage to others or require a taxpayer bailout.
But once you get into the weeds, there's always a workaround or a nasty, unintended consequence of one sort or another. Old-fashioned lending often may be riskier than betting it on prop trades anyway. It could take years before regulators figure out the full effects of all the wonderful little loopholes that well-paid bank lobbyists worked into the language. Even if the rules were flawlessly written -- and they never are -- there is the matter of whether they will be enforced consistently, which they tend not to be from one administration to the next.
There also is the issue of competence. And on this front, the regulators delivered a gem. Yesterday the federal agencies responsible for the Volcker rule sent out a "media advisory" telling reporters that staff members from the agencies would be holding a press briefing about the rule at 8 a.m. today at the Federal Deposit Insurance Corp.'s headquarters in Washington. It said: "All material from the briefing will be embargoed until 9:30 a.m.” It also included this invitation: "Beginning at 6:30 a.m., media who attend will be provided an opportunity to review the proposed final rule ahead of the briefing."
The regulators seemed to believe they could control the flow of information about the rule. And they were wrong. By yesterday evening, copies of the rule already had been obtained by Bloomberg News, the New York Times, the Wall Street Journal and the Financial Times, all of which carried articles about what it said. So much for locking up reporters in a room for a sneak peek. Before the briefing began, the stories were already out.
The banking and securities regulators would like us to think they can rein in the country's biggest financial institutions. They can't even tame a bunch of nosy journalists. Public expectations for how the Volcker rule plays out in the years to come will be and should be low.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)