Wall Street Reform: Overhaul or Mirage?

Wall Street Reform: Historic Overhaul or Mere Mirage?

by Colin Fuess

Like all of the Obama administration’s reforms, the Wall Street overhaul is as Byzantine as it is well meaning. That latter part is always hotly debated, but it’s impossible for a level mind to believe Obama is trying to make America worse than before. Even if he is, Wall Street may beat him to the punch.

On Wednesday, July 21, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is the most sweeping financial regulation in America since the Banking Act of 1933 – better known as the Glass-Steagall Act – which established the Federal Deposit Insurance Corporation (FDIC). The Harvard Law Forum describes the Dodd-Frank Act best:

“(It) effects a profound increase in regulation of the financial services industry. The Act gives U.S. governmental authorities more funding, more information and more power. In broad and significant areas, the Act endows regulators with wholly discretionary authority to write and interpret new rules.”

The Dodd-Frank Act is meant to protect ordinary people from insidious schemers like Bernie Madoff and the reckless practices of elephantine financial firms like AIG, Citigroup, Bank of America, and Goldman Sachs. The hope is that it will increase transparency and accountability on Wall Street, something with which people of all ideologies can agree.

The above summary plainly shows the other side of the coin: a bigger, more powerful federal government that will spend more money than ever. But read Obama’s lips: he promises that while there will be more spending, “There will be no more tax-funded bailouts – period.” (Check out Politifact’s running tally of Obama’s promises here).

Part of the Dodd-Frank Act is the Volcker Rule, the purpose of which is to “bar banking organizations from engaging in proprietary trading and sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited exceptions” (see the analysis by Goodwin Procter LLP).

Within just one week of the Act’s signing, Goldman Sachs found a loophole in the Volcker Rule:

“The big Wall Street firm has moved about half of its ‘proprietary’ stock-trading operations – which had made market bets using the firm’s own capital – into its asset management division, where these traders can talk to Goldman clients and then place their market bets… Simply by labeling a trade ‘customer related’ the firm can still make large market bets, and thus engage in some of the same risk taking the rule was designed to eliminate.” (FoxBusiness.com)

All it took for Goldman Sachs to circumvent the Volcker Rule was changing a couple words. Goldman Sachs’ asset management – managing their clients’ assets – will expand to managing its own assets:

“Thanks to a line in the Volcker Rule which specifies trading ‘operations unrelated to customer operations,’ as long as the ‘prop trading’ is done for client-related purposes, it’s OK… The firm’s own employees might even be considered clients and allow prop trading to occur more freely within the firm.” (BusinessInsider.com)

Back in 2009, speaking of a recent North Korean missile launch, Obama said, “Rules must be binding. Violations must be punished. Words must mean something.” Goldman Sachs, though, believes that it can change the meaning of words while still following the letter of the law. Citigroup seems ready to follow suit by moving its proprietary traders into its hedge-fund unit, something that the Volcker Rule specifically bans.

Obama’s signing of the Dodd-Frank Act into law is only the beginning of Wall Street reform. Simply put, is a law that calls for new laws. It sets down a complex timeline for its provisions to come to fruition over the next couple years. It is up to newly appointed regulators to interpret those provisions and write new laws accordingly. They have time to react to the evasive maneuvers of Goldman Sachs and others who follow. But we can already see how quickly and easily the vulpine firms on Wall Street can out-fox the federal government at every turn. It is sinister cleverness. It is Yankee ingenuity at its worst.