Goldman Sachs, Morgan Stanley, JPMorgan, “Other Banks” Ask Fed to Let them Dodge the Volcker Rule till 2022

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Hidden behind the Fed’s flip-flop theatrics about raising rates.

A decade after the first cracks of the Financial Crisis appeared – and six years since the Dodd-Frank law was enacted to prevent another Financial Crisis and to pave the way for resolving too-big-to-fail banks when they fail – Goldman Sachs, Morgan Stanley, JPMorgan, and “some other banks” are still trying to delay implementation of the new rules.

These banks are asking the Fed to grant them an additional grace period of five years to comply with the so-called Volcker rule, “people familiar with the matter” told Reuters.

The Volcker rule is one of the key elements in the massive and loopholey Dodd-Frank Act that is supposed to, among other things, limit the risk-taking associated with proprietary trading, in-house hedge funds, investments in external funds, and the like. The Volcker rule attempts to get banks out of the business of blowing their own capital on huge risky bets.

Among the many loopholes are exemptions for merchant banking and foreign exchange trading. The law also allows banks to ask for a five-year extension in selling what they deem to be their “illiquid” assets that they have to sell under the Volcker rule.

The Fed already granted the banks three one-year extensions – the last one in July. So now the deadline is July 2017. These three one-year extensions, the maximum provided for in the law, were for compliance with a broader set of rules concerning selling investments in hedge funds and private equity funds. If the Fed grants this five-year extension, it would allow the banks to drag this out through July 2022, by which time everyone will have forgotten about it, mercifully.

The banks that are asking for these extensions are the same ones that were bailed out by the Fed with nearly free loans that were so large that they reduced the Treasury’s TARP bailouts to peanuts. These are the banks that then benefited from the Fed’s QE and zero-interest-rate policy by furiously trading with these funds to where they paid record bonuses in 2009, the very year in which they were bailed out.

As a result of the Financial Crisis, the Fed, which allowed and even encouraged the shenanigans that led to the Financial Crisis, has assumed even more powers as regulator of these banks.

It’s been so long we’ve almost forgotten, distracted by the Fed’s two-year flip-flop theatrics about raising interest rates.

The Fed has asked the banks to supply additional information on the specific funds and their underlying assets to prove that they actually meet the statutory criteria of “illiquid,” the sources told Reuters. The Fed also wants to know how long it would take to unload these investments and what it would take to unload them more quickly.

The mouthpiece for this push is the Securities Industry and Financial Markets Association (SIFMA), a lobbying organization that represents broker-dealers, banks, and asset managers. “The voice of the nation’s securities industry,” it says on its website.

“SIFMA is working with our members to ensure that regulators have the data they need to adequately appraise the situation,” it told Reuters, adding that Congress intended to provide “an appropriate transition period” to exit illiquid funds without disrupting markets.

An “appropriate transition period” of 12 years?

And disrupting the markets? These big sophisticated banks already had six years to sell these investments. The stock market has doubled during that time. Bonds have skyrocketed. Residential real estate has soared. Commercial real estate has formed a historic bubble. Other assets too have soared, all part of the Fed’s Wealth Effect. Now banks are asking for another five years, from 2017 through July 2022?

But here’s the problem: banks aren’t trying to dump these “illiquid” assets overnight. They want 12 years to do it! Granted, some of these assets may have contractual limits as to selling them. But assets are only “illiquid” when you try to sell them and you can’t get what you must get for them. Drop the price enough, and suddenly these assets get very liquid.

It wouldn’t be a “fire sale”; they had years to do this! But it would be a reality check.

And this might be the problem: banks already sold a big part of the assets that don’t comply with the Volcker rule – the ones they could sell profitably in the asset price bubble the Fed created for just that purpose. But it appears they’re still not in a profitable position in these remaining assets. And now they need another Fed-engineered miracle, but they fear that miracles might take more time these days – hence five more years. And given what the Fed has already done for them, surely, it can figure out a way to make its clients happy.

After a historic “debt binge,” leverage among US corporations has reached “record highs,” S&P warns, and now they may be even more vulnerable to defaults than before the Great Recession. Read…  When Will the Record Corporate “Debt Binge” Collapse?

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  9 comments for “Goldman Sachs, Morgan Stanley, JPMorgan, “Other Banks” Ask Fed to Let them Dodge the Volcker Rule till 2022

  1. Kevin Beck
    August 14, 2016 at 6:08 am

    I would quibble with the thought that Frankendoodie was enacted to prevent another financial crisis from happening, but that quibbling would distract from the main point: Those aren’t illiquid assets; they’re just albatrosses that haven’t dropped enough in price.

    It’s totally correct to state that there is a market-clearing price for every asset; it’s just that the Masters of the Universe don’t want to throw in the towel and admit that they were so wrong in the first place. Heck, if they lowered the asking price to $1, then I know they would have some takers. But they would call that disorderly, since they would no longer have control over solving the problem that they created.

    What needs to happen is for some market-clearing to take place. And then they need to stay away from those things that they don’t understand or don’t have the will to hold to term. If they are operating real banks, they would understand that the main part of the problem is that they have short-term deposits matched up with long-term investments that they spent the deposits on. That was exactly what happened in the S&L crisis of the 1980’s. And even there, we turned it over to a government solution, just like here. Why would we expect that this government solution would work any better than the last one?

    Actually, I confess that the S&L solution DID work. It’s just that here, a different solution was attempted. And it was executed poorly, as we can see with all these waiver requests from the banksters.

    As for my impression of the real purpose of Frankendoodie: It was to force smaller community banks out of business, and into the hands of the larger banks.

  2. Meme Imfurst
    August 14, 2016 at 7:36 am

    I am sorry folks, but everyday it feels more and more like “Specter” from James Bond is closing doors on liberty, finance, freedom, privacy, success and justice, leaving behind dead banks, slavery, and limited hope for the masses all over the world.

    Everywhere you look it appears more and more like a set-up, a plan so ingenious that we slowly boil in the pot of the neocon elites and don’t know it. These banks are just a part of the elite whole, and another 5 years puts you into another “election” . Think about it. Janet will do what her boss tells here to do, the hell with any laws has been that method so far.

    Follow the money, follow the friendships, and you can see that they will win and you will loose. Checkmate, no matter how smart you think you are or what preparations you think will save you.

    A coming election for the king -of-the-world is owned by the rich, directed by the elite, and the dark matter makes the plan 20 years in advance. The blonde cowboy herding the unwashed into the coral of the boss and doing so by plan ‘to carry on the good work’ of this administration. Friendship out weighs business for the elite, ordinary folks can’t get that because we have been ‘taught’ otherwise.

    Everything is a distraction now, play acting on a stage of illusion. We are sold and still believe we have a chance, and you do IF you are a friend of the dark matter. And the banks will get what they want, just watch the next 80 days for the next ’emergency’.

    • Raymond C. Rogers
      August 14, 2016 at 5:16 pm

      It’s amazing how you blame the “neocons” for this. The Tea Party conservatives are the only organized party fighting this. Bernie Sanders had to defend voting with the the Tea Party to stop funding the Import/Export Bank. The Tea Party is the only organized force opposing the TPP.

      The conservatives along with those on the left who are courageous enough to oppose this administration are fighting this cronyism. It’s the big government republicans and the establishment on the left who really want things to stay status quo, not the conservatives.

  3. August 14, 2016 at 11:58 am

    The financial markets and banks are not ends in themselves and must not be allowed to run the economy, albeit they are important cogs in a modern inclusive economy.

    While the 2 prior posters make good points, I think the primary “takeaway,” is that preventative legislation, unless backed with criminal sanctions including mandatory prison time and disgorgement of assets on the RICO model are largely useless.

    It is now crystal clear that a modern version of Glass-Stegall, providing absolute separation between the financial services sectors, is urgently required if increasingly severe “credit crunches” and the ensuing bankruptcy of productive enterprises and massive periodic unemployment are to be avoided.

    This most definitely includes the “shadow banking,” mutual fund, and money market sectors and the proliferation of novel chimeric financial products, such as credit default swap “derivatives,” which operationally eliminate the financial “fire walls,” e. g. AIG Insurance and the structured Residential Mortgage Backed Collateralized Debt Obligations [RM/CDOs].

    A civilized and rational society should no more permit and encourage practices in their financial services sectors which are known to produce periodic recessions and the occasional “great depression.” than they allow the adulteration of their food and drugs, and continuation of unsanitary living conditions that are known to result in periodic plagues, pandemics, and chronic health conditions, even when this results in much greater profits for the food processors/producers.

  4. Lou Mannheim
    August 14, 2016 at 2:44 pm

    If most or all of these investments are holdings in PE funds, there is typically a mechanism for the LP to transfer their interest to another investor. If that’s the case, it makes you wonder why they say they need more time. Either nobody wants to invest at the current NAVs, or the banks are trying to buy more time and not leave any money on the table.

  5. Gregg Armstrong
    August 14, 2016 at 6:27 pm

    The banking gangsters have the perfect business model: “heads the banking gangsters win, tails the public loses”. Is it any wonder that they do not want to comply with any rules that encroach on their criminal crony capitalistic business model? And who owns the Feral Reserve System? The very same banking gangsters with the perfect business model. So, once again the rules will be waived yet again for the banking gangsters.

  6. micromacroman
    August 15, 2016 at 7:18 pm

    They could never have done any of this if had not 1st repealled Glass-Steagal back in 1999. That was the Graham-Leach-Blilly financial mondernization act;. Passed by republican congress, signed by a democrat president.

  7. Liberty Bell
    September 9, 2016 at 8:06 am

    Don’t forget the Commodity Futures Modernization Act of 2000, which really eviscerated restrictions on leverage, position limits, futures, swaps, and derivatives, and allowed the big investment banks to run wild. Wall Street lobbied Congress and Greenspan, and got their support to turn the markets into a global casino for their own benefit.

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