Could The Volcker Rule Rein In Propriety Trading?

American banks have, for years, been accustomed to making risky bets — not only on behalf of clients but also with their own money. But many are now protesting, and preparing for, a new measure in the works that would reign in what's called proprietary trading: The Volcker Rule. Robert Siegel talks with Ben Protess of the New York Times about a new rule intended to reign in this behavior on the part of banks.

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ROBERT SIEGEL, host: To judge from current public discussion of the Dodd-Frank financial regulation overhaul, that law is either, according to its critics on the right, another job killing burden on American business, or, according to critics on the left, a law that will hardly change things at all. So what are we to make of one rule that was written into the Dodd-Frank law that hasn't even taken effect, but is evidently leaving some banks to change the way they do business and to complain that it will cost them profits?

It's called The Volcker Rule, named for former Federal Reserve chairman Paul Volcker. And joining us to explain what it does or what it may do is reporter Ben Protess of the New York Times. Welcome.

BEN PROTESS: Thanks so much.

SIEGEL: What is The Volcker Rule?

PROTESS: So, the Volcker Rule bans proprietary trading. And what that is basically when a bank makes a trade or a bet on its own behalf, with its own money, rather than, say, working for client. And so, basically, what the Volcker Rule says it is you, banks, you can no longer use your own money to trade in the markets. You have to only work for clients.

SIEGEL: That's a bit pretty big change.

PROTESS: It's a massive change. I mean, it's a big moneymaker. It's a real sweet spot for the banks. They love prop trading, as they call it. Used to be standalone desks that did solely prop trading.

SIEGEL: So how do they get written into the bill and why is it named for Paul Volcker?

PROTESS: Well, Volcker advocated against the riskier trading and a lot of that is prop trading. And they really pushed for the Dodd-Frank law to include a ban on prop trading, so that, you know, a bank, if they were to collapse they wouldn't be doing so because they were making such risky trades and relying on the government guarantee.

SIEGEL: In theory, the people's whose money they were investing would've been aware of what it was being invested in.

PROTESS: Precisely.

SIEGEL: How are banks changing their practices to comply with this anticipated new rule?

PROTESS: Well, some of them have shut down their standalone prop trading desks. And so that means there are no longer technically standalone proprietary trading operations. But it's not always that simple. Sometimes prop trading can sneak its way into other trading desks and more client-focused businesses. And so that's kind of where, you know, even after shutting down these standalone desks, I mean, Goldman Sachs did that right after Dodd-Frank was passed. Bank of America has done that this summer.

Even after shutting down those desks, there's a lot of questions about where is prop trading existing throughout the bank.

SIEGEL: So on a scale from, say, you know, the Glass-Steagall Act from the New Deal that separated investment and commercial banking, to carry on as you were, where does this Volcker Rule fit in? How big a change?

PROTESS: It fits in somewhere in the middle. But actually it's important that you mentioned Glass-Steagall in the sense that Glass-Steagall basically made it so that investment banks and commercial banks could not be one. You had to separate the normal savings and loan, deposit - normal vanilla business of a bank - from, say, an insurance company or an investment bank or the riskier side of things.

Here, Volcker really gets at the heart of that. So they're saying, look, if you want to work for your clients, if you want to place trades for them, that's perfectly fine. If you want to take deposits or even be involved in the derivatives business, that's fine. But do not place trades with your own money and thus put the government at risk.

SIEGEL: Now, can you explain the - is a maze of agency hearings that are taking place...

(SOUNDBITE OF LAUGHTER)

SIEGEL: ...the process that this Volcker Rule is in right now?

PROTESS: Well, you said it well, it is a maze. There are five different federal regulators involved in this, ranging from the Federal Reserve to the SEC. And it's very hard to get five different agencies on the same page about anything, let alone something as controversial as the Volcker Rule. So you have - basically, over the last year and a half, since Dodd-Frank was passed, you have a lot of back-and-forth between the agencies.

They meet every week in conference calls, going back and forth on how to hammer out a compromise on these various rules. Ultimately, that leaves a lot of interested parties like the banks and, you know, on the left side you've got the consumer groups and some of the Democratic lawmakers, really trying to exert their influence on a wide range of different regulators.

SIEGEL: Well, thanks for talking with us.

PROTESS: Thanks so much.

SIEGEL: That's reporter Ben Protess of The New York Times.

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