Ban on high-risk bank trades could be finalized next week

In advance of President Barack Obama's Wednesday speech on rising income inequality in America, federal agencies announced that a key post-financial-crisis reform — intended to prevent high-risk behavior at big banks — may be finalized on Dec. 10, after nearly four years of delay. The "Volcker Rule," which would prohibit large banks from making high-risk transactions for their own profit, was enacted in January 2010 but has yet to be finalized.

Under pressure from Treasury Secretary Jacob Lew, who favors a "tough" Volcker Rule, four of the five federal agencies charged with approval — the Commodity Futures Trading Commission, the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — have stated that they will vote on it next week. The remaining agency, the Securities and Exchange Commission, has vowed to vote on the rule soon. Even if approved, it would not take effect until next July.

There is a simple concept behind the Volcker Rule: ban banks insured by the U.S. government from engaging in "proprietary trading" (trading for their own gain) and from investing in hedge funds (companies that use aggressive investment approaches to earn large returns) — the kinds of strategies thought to have produced the recent recession. However, the text of the finalized rule is expected to reach nearly 1,000 pages, with complex provisions distinguishing proprietary trading from quotidian transactions intended to "hedge" risk.

The eventual impact of the Volcker Rule, one of some 400 regulations under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, is far from clear. Some banks have already reduced or eliminated their proprietary trading arms. Others seem as committed to risky bets as ever. 

The U.S. Chamber of Commerce, which represents more than 3 million businesses, had no comment on the announcement of a Dec. 10 vote. But in its position letter to regulators dated Nov. 25, the chamber stated that the recently strengthened "Volcker Rule proposal will impede the ability and increase the cost of non-financial businesses to raise capital and manage risk." The letter cautioned the agencies against unfairly tightening the Volcker Rule in response to last year's London Whale controversy — a $6.2 billion loss resulting from high-risk bets placed by JPMorgan Chase traders. (JPMorgan Chase declined to comment for this article.)

Responses to the London Whale and debate over the Volcker Rule have revived memories of the near toppling of the global economy in 2008. Ordinary Americans suffering home foreclosures and prolonged unemployment have long complained that the bailout and subsidization of Wall Street's financial institutions — in the amount of $83 billion, according to Bloomberg News — find no corollary on Main Street.

Although the Volcker Rule and related regulations may seem esoteric, high-risk banking practices are widely regarded as having produced "concentrated wealth at the top," a reality lamented by Obama in his speech Wednesday. Moreover, as Professor Karen Ho wrote in "Liquidated," her anthropological account of Wall Street, "allowing finance to be simply abstract lets it off the hook."

"When you take gambles with other people's money, there are real ramifications for when those bets go bad," said Tamara Fucile, vice president of government affairs at the liberal think tank Center for American Progress. "Putting in place firewalls (like the Volcker Rule) — so that risky investments are walled off from normal banking — is important. The banks are crying 'Chicken Little,' but they're still making plenty of money."