Why do you aim to create a public comment letter? Why would the regulators care?

The Administrative Procedure Act requires that the public be allowed to submit comments on new regulations. With the Volcker Rule draft, the regulators have asked over 300 questions that public, including the banks being regulated, can weigh in on.

We want to ensure that it is not just the banks weighing in on the questions posed.

What is the Volcker Rule?

What is popularly referred to as “The Volcker Rule” is Section 619 from Dodd-Frank, officially titled “Prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds”.

The Volcker rule bans proprietary trading (i.e. speculation) and investments in hedge funds at government backstopped banks, but there are a large number of exceptions to the rule in the current draft, which we are concerned have the potential to be abused.

Didn’t Dodd-Frank already pass? Why are the regulators asking for comments on something that already passed?

Dodd-Frank 619 specifies that the regulators would have to follow a multi-part process to actually implement the rule. First, they were asked to create a study. You can read the results of that study here. Next, no less than eight months after the study, the regulators were required to implement Dodd-Frank 619 in a written rule. They did so in October 2011, and requested comment from interested parties on their proposed rule.  Except for the CFTC’s version, the comment period is now over.  The regulators now need to release a final version of the rule. This rule is currently set to go into effect on July 21st, 2012.

Where can I read your final letter?
You can read our 325-page comment letter to the SEC, FDIC, the Fed and the OCC on our website: http://www.occupythesec.org/letter/OSEC%20-%20OCC-2011-14%20-%20Comment%20Letter.pdf or on scribd: http://www.scribd.com/doc/81484886/Occupy-the-SEC-Comment-Letter-on-the-Volcker-Rule

Where can I read a summary of your final letter?
3 good summaries of @occupytheSEC’s Volcker Rule comment letter:

About alexis

9 thoughts on “FAQ

  1. Are you prepared to follow up your comments with court action if you feel that the final rule does not meet the requirements of the statute? Do you have the resources to carry this process through to the end?

  2. Chris gave a list of political active groups and provided their names and the number of money people behind those groups. Is there some where on your site that contains that information???

    By the way, your show is a refreshing alternative to the MSM Sunday lineup on the other net works. I’ve glad to find actual FACTS rather than 3 or 4 “ol'” Republicans telling lies and allowed to get away with it by hosts that won’t challenge the lies. Good Job!

  3. Just watched UP with Ezra and thought the conversation was solid & informative.
    i live in MN, am active in our local & state DFL.
    For 4 years now i have been preaching this theory that you have manefested, to anyone that will listen and have been thought of, and felt like, a progressive militant.
    What a relief to know you are on the job!
    i liked your FB page today and hope you will send email upates on your progress and calls for action.
    i will be sending my letters to the SEC & the FSE today!

    Keep up the GOOD WORK, we WILL deliver this will of the people to the president.

    Thank You for all that you do,

  4. Watched “Up with Chris Hayes” and was happy to see he had Alexis Goldstein on the panel again. She is so smart and gets her questions and concerns out there. Thank you for all the hard work that goes into this great organization.

  5. As this legislation was debated, the question of extraterritoriality of US regulations was repeatedly raised (by the not-credible Canadian Finance Minister Jim Flaherty among others, whose economy only looks good because of old speculation and a total lack of externality liability in global finance). This plus the loophole factor makes the Volcker Rule less likely than the restoring of plain old Glass-Steagal. It seems a fight that is lost, however heroically fought.

    I’m going to suggest a new path be considered. With the election of a socialist govt in France, the pending UN System of National Accounts changes (due to start to take effect in 2016) that will put liabilities for ecological damage on the books of most countries, the Basel III changes (requiring actual scenario stress-testing though very limited) and the weakening of resistance in the UK and Canada against taxing the most speculative financial transactions (“Tobin Tax”), after Obama is re-elected there will be an opportunity, again, to address “too big to fail” (what Volcker primarily does).

    At that time, I suggest, the time will be ripe to re-open debate on taxing speculative transactions. Traders will argue (with some justification) that what they primarily do is “hedge” exposures. For instance, farmers must hedge against drastic drops in price in the commodity foods they sell. A computer mainboard maker putting more and more copper in their product can legitimately hedge any increase in the price of copper. Or, a pension fund with fixed payout obligations and certain stock holdings (that do not change much day to day except according to a fixed policy on dollar cost averaging, etc.) may have a legitimate need for a much more complex derivative. A reasonable position, basically Tobin’s, is that a very short term holding is a reliable and sufficient signal of a speculative transaction, and it’s thus the intra-day holds that should be taxed, and that holds held for less than say five minutes might be taxed to an even greater degree. I don’t disagree with this position but it’s been difficult to push through diplomatically.

    So, the policy approach I suggest Occupy The SEC explore, as one of many perhaps, is that it support a very graduated financial transactions tax in which a small tax may apply to holds of less than say one quarter, which would draw a line between those which are responding to quarterly reports of fundamentals in the economy, vs. those that are driven by more speculative information. A larger tax would apply to intra-week and even larger to intra-day and the most to intra-minute types of trades, as these are less and less likely to be responses to fundamentals or legitimate hedge needs and more and more likely to be responses only to aggregate numbers, rumour and other risk-intensifying data sources, including illegal ones such as unreported insider trading. [I leave the initial tax rate curve and enforcement to others to define.]

    What may make it work now when it has failed in the past is that Basel III and SEC stress testing have forced (at least a certain size of) institutions to do scenario-based analysis and reveal its results. Accordingly the institutions must all have capabilities to perform this, and to require tougher stress tests (say five scenarios instead of the typically mandated three, including extreme scenarios that are considered extremely unlikely or impossible) as a requirement to exempt the tax on the quarterly or monthly holds, does not require them to do anything qualitatively different. Given IBM has bought Algorithmics, a one-time technology leader on this kind of hedge analysis, it seems likely that powerful allies can be brought in to advocate transparent proofs of hedge, or at least proofs that *some* multi-scenario analysis shows the transaction to be a hedge, as a tax exemption requirement. This may be generated by a simple function keypress with the right software, but at least, it commits the traders legally to a particular claim that the scenarios were legitimate, the transaction a hedge, that it does something useful to the customer who purchases it, and (most important) also establishes a standard for how scenarios and projections are shared with the SEC. It will no longer be possible for senior management to deny responsibility for systemic risks – those due to too-narrow scenarios, non-credible estimates, or traders simply breaching their value-at-risk limits. [Exactly the reason they don’t voluntarily use this kind of technology now, it’s been around for decades.]

    For very short term transactions, including intraday trades and quicker, more analytic and systems investment will be required (very good for companies vending it like IBM etc.) and the expense of this will itself discourage some wildly speculative plays. It will be quite difficult for trader management to argue that they necessarily must be ignorant of the total systemic risk (not the same as traders being aware of each other’s plays, which does increase systemic risk). But, if they choose to be, fine. They simply pay a tax for the assumed systemic risk that they’re putting on others.

    In other words, the shorter the transaction, the higher the tax, but exemptions are available to those willing to make transparent the entire motivation for the hedge (valid or not, that can only really be determined post-facto and statistically). That allows those who insist on opaque proprietary trading based on trader instinct and a total lack of management accountability to continue, but not to export risk to others who are behaving responsibly, because they are paying a higher tax for the privelege.

  6. Three other likely effects I predict:

    Customers, who would be aware of which institutions are paying the tax to remain opaque and which are revealing scenario justifications for hedges on behalf of their customers or themselves, can choose to deal at their own risk with the more opaque, knowing they are paying a tax indirectly, and knowing they are dealing with senior management which “doesn’t want to know” the aggregate risk picture or discipline their scenario analysis to include anything beyond the 0-3 minimum required in law (and only for large institutions). These customers can be denied bailout coverage beyond certain minimums, or any. Foreign customers could be completely denied it. This would cause a significant pressure away from opaque trading shop practices.

    Institutions, feeling this pressure, would be highly motivated to legally divide trading floor operations from banking operations. Thus the Volcker Rule is implemented by incentive (tax relief, looking transparent and honest to customers) rather than force.

    Regulators, with a vast incoming stream of real-world transaction hedges (some of which will be falsified or shallow, but so what, the cost of constructing fake ones to escape a small tax is itself a disincentive), will have radically more real-time warning of failures to anticipate scenarios that the most qualified doomsayers think should be on the radar. It will be possible to nudge traders into using more extreme scenarios, perhaps including some that are simply not believable to the groupthink of Wall St., but are clear to the Pentagon (like climate change and ocean acidification conflicts) or State Department (like China or Saudi Arabia using leverage of its debt holdings for political purposes) or Fed (like Canada’s economy contracting under the new SNA or as internal conflict & green technologies pop the dirty fossil fuel bubble). Upside potentials, too, those “too good to be true”, can be encouraged, such as an R&D breakthrough in cold fusion or a persistent profit margin increase for organic or local foods, can be nudged into the equations, so Monsanto finds it harder to raise money and your local farmer finds it easier. A careful encouraging to consider high impact low probability upside scenarios can reduce many fundamental risks of malinvestment. Extremely risky questionable investments in marginal “fracking” gas or deep oil exploration, new big fission plant designs, carbon sequestration, custom land-grown biofuels, start to look bad, while investing in small R&D-intensive (and mostly US) companies start to look good. Spain, with its easily-fundamentally-justified investments in solar power and high speed rail and high-efficiency cities, starts to look like less of a bond risk, and this can keep its sovereign debt price low.

    Radical transparency and the sharing of extreme explicit scenarios have many benefits. As Don Tapscott puts it, “if you’re going to be naked, you better be buff.” As Ron S. Dembo puts it, “know what you own, use multiple scenarios, anticipate regret.” http://www.slopenagency.com/sa/rondemboanddanielstoffman All of Wall Street’s customers should probably read that, and think hard about what “regret” is.

    Technically Wall Street and its critics and regulators could do worse than read this:

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