WASHINGTON -- Christmas came early for Wall Street this year. The Federal Reserve on Thursday granted banks an extra year to comply with a key provision of the Volcker Rule, a move that gives financial lobbyists more time to kill the new regulation before it goes into effect.
The Volcker Rule is a key element of the 2010 Dodd-Frank financial reform law that bans banks from engaging in proprietary trading -- speculative deals that are designed only to benefit the bank itself, rather than its clients. Thursday's move by the Fed gives banks an additional year to unwind investments in private equity firms, hedge funds and specialty securities projects. The central bank also said it plans to extend the deadline by another 12 months next year, which would give Wall Street a two-year reprieve through the 2016 presidential election.
The Fed's delay comes less than a week after Congress granted Wall Street a reprieve from another reform that had been mandated by the 2010 Dodd-Frank financial reform law. The measure, known as the swaps push-out rule had eliminated federal subsidies for trading in risky derivatives -- the complex contracts at the heart of the 2008 banking meltdown. Bank watchdogs say the Volcker Rule delay adds insult to injury.
"Swaps pushout was a club," said Marcus Stanley, policy director for Americans for Financial Reform. "This is a stiletto."
Big banks including Goldman Sachs and Morgan Stanley have billions of dollars invested in private equity firms that they would have to sell at a loss based on current prices, according to a Bloomberg report from early December. Dodd-Frank gave banks four years to unwind their investments in speculative enterprises, setting a deadline of July 21, 2014. The Fed had previously extended that deadline by one year, and now plans to push it out to July 2017.
"The Street has had years of notice to unwind these investments, and it appears that their self-serving complaints have been accepted fairly uncritically without a real analysis for the basis of the claim," said Dennis Kelleher, president and CEO of Better Markets, a financial reform advocacy group. "If you can't get out of a trade in seven years, it's probably not the kind of trade you should be doing."
Dodd-Frank included an exemption for particularly illiquid investments that banks could not reasonably sell off in a timely manner. But banks were required to document their troubles in detail to prove that they would, in fact, have trouble exiting their contracts. The Fed's move Thursday provides a blanket exemption to all bank investments in speculative enterprises.
Progressive Democrats were outraged by the decision.
"Every day -– every single day –- we are at risk of a market meltdown that would wreck our economy even worse than the 2008 crash did, or even than the 1929 crash did," Rep. Alan Grayson (D-Fla.) told HuffPost. "Six years after the fact, we have taken no significant action to reduce the Wall Street gambling or 'too big to fail' concentration that caused the 2008 crash. If we can’t even implement the Volcker Rule, an extremely modest effort to stave off total disaster, then total disaster is exactly what we can expect."
"The financial system will be in better hands once Dodd/Frank is fully implemented," said Eric Harris, a spokesman for Rep. Gwen Moore (D-Wis.). Moore had previously backed various efforts to chip away at Dodd-Frank's derivatives rules, but strongly opposed last week's swaps push-out repeal.
"The Wall Street Casino is alive and well," said Sen. Jeff Merkley (D-Ore.), who co-authored the Volcker Rule statute with Sen. Carl Levin (D-Mich.). "Last week it was Congress granting the big banks the right to keep trading on banned risky derivatives with government backing. Today it is the Fed granting big banks two more years to make big bets through direct ownership of private equity and hedge funds. It all amounts to the same thing – spineless accommodation of the big banks’ desire to run taxpayer-subsidized hedge funds. This is wrong for taxpayers and it is wrong for the stability of our banking system. We expect more of the Federal Reserve."
The delay is an embarrassment for President Barack Obama, who championed the Volcker Rule in 2010, as well as for Fed Governor Daniel Tarullo, a major proponent of tougher regulation at the central bank. It is a victory for the Fed's top lawyer, Scott Alvarez, a holdover from the years when Alan Greenspan served as chairman. Alvarez suggested watering down the Volcker Rule at a conference for bank lawyers in November.
"This is clearly the doing of Federal Reserve general counsel Scott Alvarez," one Democratic aide told HuffPost.
Six years after Dodd-Frank passed, proprietary trading persists on Wall Street. In 2012, JPMorgan Chase lost over $6 billion on an infamous proprietary trade known as "The London Whale."
This article has been updated to include Merkley's comment.