The Volcker rule

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The best thing about Obama's proposal for new restrictions on banks' activities is the branding: you cannot do better than the "Volcker rule". But how the rule would work, if it were ever adopted, is very unclear. No more "proprietary trading" by banks or institutions owning banks? Well, as Lex rightly says, it depends what you mean by proprietary trading.

The detail will make a huge difference. For example, pure proprietary trading - investment by the bank on its own, not clients' behalf - at JPMorgan Chase contributes well below 1 per cent of revenues. But much client trading involves taking balance sheet positions and then holding them. So when does client work cross the line into prop trading?

Lex is right about something else too:

This is not a return to Glass-Steagall. It is a targeted attack on specific businesses that the government does not wish to back. Yes, those activities can be risky. They will require regulation whether in or outside banks. They were also not the cause of most bank losses.

Exactly.

Suppose Goldman Sachs were to comply with the Volcker rule by relinquishing its bank status (which it adopted after the crisis was upon us, with the authorities' blessing, to avail itself of the full range of assistance). When the next crisis comes round, would the Treasury be able to let Goldman fail? The Lehman experience answers the question. Lehman was not a commercial bank. If Goldman, having reverted to non-"bank" status, could not be allowed to fail, what would the Volcker rule have achieved? Whether or not Goldman is a bank, it has to be more tightly regulated.

This is mainly a political initiative, as the FT report notes, and not without political risk. One danger is creating and exposing disarray inside the Obama economic team. The new proposal, good or bad, is a U-turn. Geithner has spent months arguing for a different approach. His days must now be numbered. (In Britain, his position would be described as "unassailable".)

The other risk is Volcker himself. If Obama intends to use him as front-man for populist bank-bashing, I'd bet that before long he will regret it. Volcker is forthright, immensely experienced and widely respected. That is why he is so valuable. But he is also apolitical, fiercely independent, and nobody's shill. Not the ideal pitch-man.

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