Why the Volcker Rule is crucial to the 99%

We, concerned citizens, believe that regulators must enforce the Dodd-Frank Act's provisions to end proprietary trading by banks
Paul Volcker
Wall Street lobbyists have been working to water down former Federal Reserve Chairman Paul Volcker's contribution to the Dodd-Frank financial reform act. Photograph: Cliff Owen/AP




Proprietary trading by large-scale banks was a principal cause of the recent financial crisis (pdf), and, if left unchecked, it has the potential to cause even worse crises in the future. In the words of a banking insider, Michael Madden, a former Lehman Brothers executive:

"Proprietary trading played a big role in manufacturing the CDOs and other instruments that were at the heart of the financial crisis. … If firms weren't able to buy up the parts of these deals that wouldn't sell … the game would have stopped a lot sooner."

The interconnectedness of banks under the shadow banking system had the effect of magnifying one bank's proprietary trading losses (eg, Lehman Brothers) and transferring them across the market as a whole. Lobbyists' exhortations notwithstanding, proprietary trading by government-backstopped banks is a fundamentally speculative and risky phenomenon that must be circumscribed.

During the legislative process, the Volcker Rule was woefully enfeebled by the addition of numerous loopholes and exceptions. The banking lobby exerted inordinate influence on Congress and succeeded in diluting the statute, despite the catastrophic failures that bank policies have produced and continue to produce. Nevertheless, the Volcker Rule, in its current statutory form still has the potential to rein in certain speculative trading practices by banking entities that enjoy ready access to customer deposits and virtually limitless funding through various Federal Reserve programs.

We encourage the agencies to stand strong against the flood of deregulatory pressure that they have and will continue to face in connection with their implementation of the Volcker Rule. A vigorously implemented and enforced Volcker Rule would serve as insurance against the need for future bank bailouts funded by taxpayers. The agencies must take advantage of this historic opportunity to protect the financial position of the average person living in the United States.

This is an edited excerpt of opening remarks from Occupy the SEC's 325-page submission to the SEC, FDIC, the Federal Reserve and the OCC, which comments on the notice of proposed rulemaking for the Volcker Rule. The full text of the letter is available online and as a downloadable pdf.