Federal regulators have now crossed "agreement on the Volcker Rule" off their checklist. Implementing the rule, which aims to keep banks from trading for their own profit, was some of the unfinished work called for by the landmark Dodd-Frank reform act signed into law in 2010.
Among regulators voting for the Volcker Rule was Commissioner Bart Chilton of the Commodities Futures Trading Commission. In a Bankrate interview, Chilton says the change stops some risky behavior that led to the financial crisis. "I called 1999 to 2008 a decade of deregulation that took place. That resulted in a fairly laissez-faire, a relaxed atmosphere on Wall Street and among financial regulators, people that do jobs like I do," says Chilton.
Looking back, he says the crisis could have been even more damaging. He blames "the lax rules, laws and regulations that led to many of these 'Wall Streeters' and their firms being overleveraged and the possibility that the economy could even tank worse than it did." Chilton says, "We were in a recession, but it could have been an outright depression."
Response to 'London Whale'
Critics have pointed to the need to address other more recent issues, such as the $6 billion trading loss at JP Morgan Chase. The loss has been blamed on a trader dubbed "The London Whale." Chilton says the Volcker Rule would "definitely" have prevented the loss.
The rule is extremely complex -- running more than 900 pages. Former Federal Reserve Chairman Paul Volcker, for whom the rule is named, has said he wished it had been more simple. Chilton agrees, saying, "I certainly think this could have been done in a much more streamlined fashion."
Shedding light on an imperfect collaborative process in Washington, Chilton refers to an old joke about a camel. "A camel is a horse that was developed as a result of a committee. Any time you have many regulators, and in this case we had five different financial regulators involved in it, you end up not with a horse but with a camel. In this case with the Volcker Rule, you have a camel with two, three or maybe 1,000 humps."
Further regulation ahead?
Chilton says the rule helps to restore part of the spirit of the Depression-era Glass-Steagall Act. The law, which restricted banks from trading, was repealed in 1999 during the Clinton administration. "What we did in Volcker partially repeals the repeal, if you will. It gets pretty close to that," says Chilton.
Hoping to take re-regulation a step further, senators Elizabeth Warren, D-Mass., and John McCain, R-Ariz., are supporting what they call the 21st century Glass-Steagall Act. They claim it would "make 'Too Big to Fail' institutions smaller and safer, minimizing the likelihood of a government bailout." But Chilton says he doesn't have much hope that a bipartisan spirit will prevail in Washington anytime soon to get legislation like that approved.
What do you think about the new regulations being passed?
Follow me on Twitter: @hamrickisms.
Does new rule get tough with banks?
Federal regulators have approved the complex and lengthy Volcker Rule. Does that make economy more crisis-proof?
LISTEN TO AUDIO
[Music up and in]
Mark Hamrick: From Bankrate.com this is Your Money This Week. We connect the dots between what's happening in the world and your wallet. I'm Mark Hamrick reporting from Washington.
Mark Hamrick: Can another financial crisis be avoided? Are we doing enough to integrate the lessons learned from that episode in 2007 and 2008? We chat with the outspoken Commissioner Bart Chilton from the Commodities Futures Trading Commission. I promise you'll find his comments intriguing about what's been done and about what still needs to be done. And Bankrate's own Holden Lewis chimes in on things your real estate agent wishes you knew. And we'll take a look back in business history at FM radio. All of that and more coming up on "Your Money This Week."
Mark Hamrick: On the face of it, you might think there's no reason for you to care about the complex Volcker Rule recently agreed to by federal regulators. But think again and we can recall how the near-collapse of the nation's financial sector five years ago had repercussions stretching throughout not only the US, but the world and all of our personal financial lives. So the continuing responses to the crisis do affect all of us; and ultimately it's up to the members of the public to try to let elected leaders know what we want them to do for us. In that spirit, we spoke with a particularly outspoken financial regulator, who also happens to be good at explaining what the Volcker Rule does and whether it makes the economy at least a little bit safer. Commissioner Bart Chilton with the Commodities Futures Trading Commission, that's one of the five federal regulators that've signed off on the Volcker Rule. Commissioner, to begin, you're quite gifted in speaking in a straightforward way in a city where that is not a gift commonly handed out (chuckle); and so we're talking about the Volcker Rule, which apparently is running about 1,000 pages and is obviously complex within those many words that are doled out there. I was thinking, if you were sort of standing over the fencepost in a backyard to explain it to a neighbor, what's the most important takeaway about the Volcker Rule?
Commissioner Bart Chilton: Well -- and it's good to be with you again, Mark. So the deal is, is that the large banks have been engaging in debts like they were a casino for the house. Now look, if they want to make bets, some people win, some people lose, that's fine. But when those bets impact everybody, everybody that sees this or hears this, and everybody in our country to the tune of about fourteen hundred dollars per person -- everybody in the country -- and that's what took place in 2008 with the Big Bang Bailout. Then we all have an interest in those fairly risky bets that could be taking place. So what the Volcker Rule does, it says you can no longer do those bets. You can only be in markets and placing bets for your customers, not for yourself. That's pretty much what it does at a very basic level.
And Commissioner, a lot of people point to really two watershed events, one being obviously more dramatic than the other, both the financial crisis in 2007 and '08 and then the so-called London Whale Trade, which resulted in a six billion dollar loss, as you know, at J.P. Morgan Chase. Would the Volker Rule, when finally put into place, have prevented either of those two?
Commissioner Bart Chilton: It would definitely prevent the London Whale and it will prevent the environment that existed in 2007 and 2008, and even before then actually, Mark. I mean I call 1999 to 2008 a decade of deregulation that took place. And that resulted in a fairly laissez faire, a relaxed atmosphere on Wall Street and among financial regulators, people that do jobs like I do. And it was those lax rules, laws and regulations that led to many of these Wall Streeters and their firms being overleveraged and the possibility that the economy could even tank worse than it did. I mean we were in a recession, but it could have been an outright depression, not that there's that much difference between the two for many people who are listening and watching this. So those are the things that it tried to avoid: changing the atmosphere, changing the culture on Wall Street. And it would also avoid the circumstance like the London Whale. And I'm happy to talk in more detail whenever you want about how we do that, but it will also stop, as you say, $6 billion loss that turned out to be a speculative bet for J.P. Morgan that went bad.
Mark Hamrick: Now some people look at the complexity of the rule in the sense of the length of it, let's say, and say, well, that is an indication that essentially too many lobbyists got their hands involved in this process. What would you say to that criticism?
Commissioner Bart Chilton: Well, government -- that's what we do. I mean Government R Us. We write rules and it's oftentimes way too many words and way too many rules. I certainly think this could have been done in a much more streamlined fashion. By the same token, the law did allow certain things to take place. So there are certain bets that are done by the banks for the bank's own hedging. And when I say hedging, I mean if they have a business risk, they are allowed to bet to mitigate that business risk. So they're not allowed to bet in a big gamble for the house. So writing these fairly gray areas, writing language for these gray areas, it takes a few words. Unfortunately, it took too many. There's an old saying in Washington: do you know what a camel is? A camel is a horse that's developed as a result of a committee. So anytime you have many regulators, and in this case, we had five different financial regulators involved in it, you end not with a horse but with a camel. And in this case with the Volcker Rule, a camel with two, three or maybe 1,000 humps.
Mark Hamrick: Well, that's hilarious and I've been in Washington for almost three decades, and I have to say that's the first time I've heard it. So that's remarkable.
Commissioner Bart Chilton: (Laughter)
Mark Hamrick: So in terms of regulation, we know that many of the echoes of the financial crisis continue to play themselves out particularly in the sense of responses. One thing that's rattling around is the so-called 21st Century version of the Glass Steagall Act, which would further let's say undo some of the deregulation as you know that happened during the Clinton Administration and subsequent to that. Do you think that something along those lines is a good idea?
Commissioner Bart Chilton: I do, I mean conceptually I do. Now the Volcker Rule actually rolls back the Glass Steagall Law. I mean the Glass Steagall Law said that -- and this is a Depression-era law, Glass Steagall, that we repealed, as you say, 1999 the last of the Clinton Administration, the last two years of the Clinton Administration. And it said that banks could not be involved in this proprietary trading, this trading and gambling for the house. And that was repealed back in 1999. So what we did in Volker partially repeals the repeal, if you will. And so it gets pretty close to that. But there are some other things like the 21st Century Glass Steagall Act and other efforts, some that I have vocally supported, like getting the banks out of the ownership of commodities, which is a huge issue. I mean if you own the commodities and you trade in the commodities, you can impact the price of the commodities, yet there is no transparent means for regulators to see that and you can potentially push prices around and prices impact consumers. So that's a big deal for me and a larger concern along with some other legislation on the Hill going forward, Mark.
Mark Hamrick: Well, now that it seems as if a bipartisanship is, dare I say, breaking out all over, are you more hopeful in 2014 some meaningful legislation along these lines that you're looking for could actually be approved?
Commissioner Bart Chilton: Unfortunately, I'm not that optimistic. I think the bipartisanship may be short lived. I think the conservatives don't want to be tagged with another government shutdown, particularly when the administration keeps shooting themselves in the foot with Obamacare. And so I think, don't interrupt your foe when they're making mistakes. And a lot of times in Washington, it actually takes a debacle or a calamity like the recession that we've been in until you see something happen. I sure hope that doesn't occur with regard to financial markets that we have to see another hit someplace before some of these other fairly, I think, sensible policies are changed. But with that, you can hope for the Redskins and your luck. We'll have to see how it goes, so.
Mark Hamrick: (Laughter) Commissioner, thanks so much for your time. We appreciate it very much. It's great to catch up with you.
Commissioner Bart Chilton: Sure. And thank you for all that you do to get the message out there on some of these things. Take care and happy holidays.
Mark Hamrick: Commissioner Bart Chilton of the Commodities Futures Trading Commission. He spoke with us from Washington.
Mark Hamrick: The process of selling the house ought to be simple enough. But there's a reason why people pay realtors. It's because they have specialized knowledge often serving as a coach to sellers who sometimes fail to get out of their own way. Bankrate's Holden Lewis tells us things your real estate agent wishes you knew.
Holden Lewis: Real estate agents have seen it all while showing houses for sale: unmade beds, unrealistic prices and orange shag carpeting. So there are a few things that agents wish you already knew. For one, real estate agents wish you understood, really understood, that the longer the house is on the market, the less likely it is to fetch fair value. Sometimes it's better to set a price just under the market value. You're more likely to get competing offers and sell more quickly. Another thing agents wish you knew, it's a bad idea to get a car loan before you close on the house. Avoid new debt until you've closed on the mortgage. The lender is going to check your credit a day or two before closing. New debt could cause a delay. Finally, the house needs to be presentable. Sure, it has to be clean and tidy, but also avoid cooking smelly foods while the house is for sale. Create a warm, inviting, comfortable environment for would-be buyers. For more on this and other personal finance issues, this is Bankrate.com. I'm Holden Lewis.
Mark Hamrick: Finally, our look this week at business history. On Dec. 18, 1890, Edwin Armstrong, an electrical engineer and the American inventor of FM radio, was born in New York. He worked for RCA, also known as the Radio Corporation of America. While FM would flourish, even to this day, Armstrong himself became embroiled in legal battles with RCA that left him a broken man. But after his death, his heirs would benefit from victories which swung the other way. But Armstrong himself did not live to see the vindication.
Mark Hamrick: You've been listening to Your Money This Week. Thanks to our special guest, Commissioner Bart Chilton of the CMTC. If you enjoyed the podcast, please check us out on iTunes and rate and subscribe to the program. We're hoping that you can help us to get the word out. And also check out our other podcast Special Report with Breaking News and Special Features. For more on this and other personal finance issues, visit Bankrate.com and you can follow us on Twitter at Bankrate and I'm @hamrickisms. Thanks to producer Lucas Wysocki for his work in the studio. I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.
[Music up and out]