1
00:00:03,480 --> 00:00:07,560
Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

2
00:00:07,640 --> 00:00:10,440
Speaker 1: day we bring you insight and analysis into the most

3
00:00:10,480 --> 00:00:13,399
Speaker 1: important legal news of the day. You can find more

4
00:00:13,480 --> 00:00:18,040
Speaker 1: episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud

5
00:00:18,320 --> 00:00:22,640
Speaker 1: and on Bloomberg dot com slash podcasts. A Trump administration

6
00:00:22,800 --> 00:00:26,720
Speaker 1: de regulatory priority will take effect on January one, as

7
00:00:26,760 --> 00:00:30,640
Speaker 1: two regulators ease the Vocal Rules controversial ban on banks

8
00:00:30,720 --> 00:00:35,560
Speaker 1: making speculative investments. It's called Vocer two point no. Joining

9
00:00:35,600 --> 00:00:38,840
Speaker 1: me as Robert Hockety, professor at Cornell Law School, Bob

10
00:00:38,960 --> 00:00:42,320
Speaker 1: tell us about the biggest changes that were approved with

11
00:00:42,400 --> 00:00:46,320
Speaker 1: this new rule, I do, yeah. This is the principle change.

12
00:00:46,360 --> 00:00:48,440
Speaker 1: I think, the one that this most movie most welcome

13
00:00:48,680 --> 00:00:51,080
Speaker 1: on the front of the banks is a change in

14
00:00:51,120 --> 00:00:53,680
Speaker 1: the presumption that was part of the Vocal rule before.

15
00:00:54,000 --> 00:00:56,240
Speaker 1: So previously, the presumptions that you were if you were

16
00:00:56,280 --> 00:01:00,280
Speaker 1: engaging in short term trading, it was probably speculative other

17
00:01:00,320 --> 00:01:02,720
Speaker 1: than hedging, and it was up to you to rebut

18
00:01:02,720 --> 00:01:05,679
Speaker 1: that presumption, so basically to prove that you are innocent,

19
00:01:05,720 --> 00:01:08,000
Speaker 1: so to speak, or that you were merely hedging in

20
00:01:08,000 --> 00:01:11,480
Speaker 1: other words, rather than speculating. Uh, that presumption will go

21
00:01:11,560 --> 00:01:14,080
Speaker 1: by the wayside now, and I think that that's probably

22
00:01:14,080 --> 00:01:17,039
Speaker 1: going to elicit the greatest sort of sigh of relief

23
00:01:17,040 --> 00:01:18,720
Speaker 1: on the part of the banks. How much of a

24
00:01:18,880 --> 00:01:23,640
Speaker 1: victory is this for the banks? It's it's easy to

25
00:01:23,720 --> 00:01:26,560
Speaker 1: overstate the degree of the victory, but but it's to

26
00:01:26,640 --> 00:01:28,960
Speaker 1: some extent going to determine. I mean, it's going to

27
00:01:29,040 --> 00:01:32,160
Speaker 1: sort of depend on what what what. The actual cause

28
00:01:32,360 --> 00:01:35,480
Speaker 1: of the sort of cutback and proprietary trading over the

29
00:01:35,560 --> 00:01:37,720
Speaker 1: last few years has been right, so as you know,

30
00:01:37,880 --> 00:01:40,280
Speaker 1: the proprietary trading books of the larger banks are much

31
00:01:40,280 --> 00:01:42,679
Speaker 1: smaller than they were before Vulker went into effect. But

32
00:01:42,760 --> 00:01:45,920
Speaker 1: there's some sort of uncertainty I guess we would say

33
00:01:46,319 --> 00:01:48,040
Speaker 1: as to whether the Volcan the rule itself was a

34
00:01:48,120 --> 00:01:50,000
Speaker 1: reason for that, or whether there are other reasons that

35
00:01:50,240 --> 00:01:52,840
Speaker 1: sound more in sort of changes in the industry. If

36
00:01:52,880 --> 00:01:55,080
Speaker 1: it's the latter than the change in Vulcar isn't going

37
00:01:55,120 --> 00:01:56,920
Speaker 1: to make much difference. If, on the other hand, the

38
00:01:56,960 --> 00:01:59,800
Speaker 1: Vulcar rule itself was an important part of that story, well,

39
00:01:59,800 --> 00:02:02,880
Speaker 1: then of course it could bring about an up search

40
00:02:02,960 --> 00:02:05,280
Speaker 1: in proprietary trading of a kind that was quite common

41
00:02:05,360 --> 00:02:09,720
Speaker 1: of course, before one Democratic fd i C board member

42
00:02:09,880 --> 00:02:14,200
Speaker 1: warned that the rollback could again endanger the financial system

43
00:02:14,240 --> 00:02:17,360
Speaker 1: by allowing lenders to recklessly trade hundreds of billions of

44
00:02:17,400 --> 00:02:22,399
Speaker 1: dollars in risky assets as they did before the financial crisis.

45
00:02:22,600 --> 00:02:25,760
Speaker 1: Do you agree with that? Well, I understand where Mr

46
00:02:25,800 --> 00:02:28,520
Speaker 1: Grinberg's coming from on that, But again, whether he's right

47
00:02:28,680 --> 00:02:31,240
Speaker 1: or not sort of depends again on what the cause

48
00:02:31,880 --> 00:02:36,119
Speaker 1: of the decline and proprietary trading since has been. If,

49
00:02:36,200 --> 00:02:38,919
Speaker 1: again that was owing to the vocal rule itself, that

50
00:02:38,960 --> 00:02:41,079
Speaker 1: he could very well be right. If, on the other hand,

51
00:02:41,120 --> 00:02:43,080
Speaker 1: there have just been changes in the industry that makes

52
00:02:43,440 --> 00:02:47,000
Speaker 1: proprietary proprietary trading less attractive than it used to be,

53
00:02:47,360 --> 00:02:49,320
Speaker 1: then it might very well be that his alarm it's

54
00:02:49,360 --> 00:02:54,560
Speaker 1: not quite as justified. Does the new rule give lenders

55
00:02:54,600 --> 00:03:00,200
Speaker 1: a better picture of what trades are prohibited? I think

56
00:03:00,280 --> 00:03:03,680
Speaker 1: it resolves a certain kind of uncertainty on their part, right,

57
00:03:03,720 --> 00:03:05,960
Speaker 1: I think. And it's not so much an uncertainty as

58
00:03:06,000 --> 00:03:08,680
Speaker 1: to whether you know their trades a proprietary or not,

59
00:03:08,760 --> 00:03:11,280
Speaker 1: because they would actually whether the trades are specultive or not,

60
00:03:11,440 --> 00:03:14,120
Speaker 1: because ultimately they know that. But what it doesn't do is.

61
00:03:14,160 --> 00:03:16,400
Speaker 1: I think it resolved some uncertainty that they would be

62
00:03:16,440 --> 00:03:19,160
Speaker 1: experiencing as to whether the regulators would be likely to

63
00:03:19,200 --> 00:03:21,280
Speaker 1: find that to be the case or not. And in

64
00:03:21,280 --> 00:03:24,200
Speaker 1: that sense it does resolve in uncertainty that's probably helpful

65
00:03:24,240 --> 00:03:28,000
Speaker 1: to them. And what about compliance costs, Well, this ease

66
00:03:28,080 --> 00:03:31,680
Speaker 1: some of the compliance costs. It should make compliance a

67
00:03:31,680 --> 00:03:34,520
Speaker 1: little bit less costly because you're not as concerned with

68
00:03:34,600 --> 00:03:37,960
Speaker 1: proving what your motives were engaging in the particular trades

69
00:03:38,000 --> 00:03:40,080
Speaker 1: that you were engaging. And in other words, the fact

70
00:03:40,120 --> 00:03:42,640
Speaker 1: that the presumption of guilt, so to speak, is being

71
00:03:42,680 --> 00:03:45,920
Speaker 1: removed itself makes it easier to comply because you don't

72
00:03:45,920 --> 00:03:48,120
Speaker 1: have to do as much proving as you would otherwise

73
00:03:48,160 --> 00:03:52,840
Speaker 1: have had to do. And um, do you anticipate that

74
00:03:53,040 --> 00:03:57,640
Speaker 1: there might there will be more increased investments for the banks.

75
00:03:59,080 --> 00:04:01,040
Speaker 1: I'm a little kept to cool about that, June, but

76
00:04:01,200 --> 00:04:04,080
Speaker 1: because I really don't think that the degree of additional

77
00:04:04,120 --> 00:04:08,000
Speaker 1: liquidity that comes through proprietary trading of the science of

78
00:04:08,080 --> 00:04:10,840
Speaker 1: the banks do really makes that much difference to the

79
00:04:10,880 --> 00:04:13,360
Speaker 1: actual investing that they do. It makes a difference to

80
00:04:13,400 --> 00:04:15,720
Speaker 1: the trading that they do. The trading is the secondary

81
00:04:15,720 --> 00:04:18,360
Speaker 1: market activity of course, and investing is a somewhat different

82
00:04:18,360 --> 00:04:22,480
Speaker 1: sort of operations. And I'm actually skeptical that the sort

83
00:04:22,520 --> 00:04:25,320
Speaker 1: of additional degree of liquidity that might be provided by

84
00:04:25,320 --> 00:04:27,479
Speaker 1: the additional degree of trading that might be engaged in

85
00:04:27,920 --> 00:04:29,679
Speaker 1: is going to make any serious difference to the amount

86
00:04:29,680 --> 00:04:31,839
Speaker 1: of investing. And I think the amount of investing ultimately

87
00:04:32,320 --> 00:04:35,600
Speaker 1: rides on what the prospects of adding value to the

88
00:04:35,640 --> 00:04:39,200
Speaker 1: primary economy are, and you know, that's really a matter

89
00:04:39,240 --> 00:04:42,080
Speaker 1: of the real economy rather than the financial economy. So

90
00:04:42,120 --> 00:04:45,280
Speaker 1: then you think that it's sort of the complaints about

91
00:04:45,360 --> 00:04:49,960
Speaker 1: this from some regulators are are overblown. I think they

92
00:04:50,000 --> 00:04:53,680
Speaker 1: probably are overblown. Um, I think the complaints about the

93
00:04:53,760 --> 00:04:56,920
Speaker 1: rule being in existence at all were very much overblown.

94
00:04:57,279 --> 00:04:59,720
Speaker 1: But I also think that the complaints about easing up

95
00:04:59,720 --> 00:05:02,719
Speaker 1: on the rule are overblown. Basically, this is a so

96
00:05:02,800 --> 00:05:05,280
Speaker 1: called This is a form of so called smart regulation

97
00:05:05,400 --> 00:05:07,360
Speaker 1: that tends to be sort of too clever by half.

98
00:05:07,800 --> 00:05:09,680
Speaker 1: I think those who sort of propound things like this

99
00:05:09,800 --> 00:05:11,680
Speaker 1: rather than more kind of bright line rules like the

100
00:05:11,720 --> 00:05:15,279
Speaker 1: Glass Equal Act used to have in place. Um, you know,

101
00:05:15,320 --> 00:05:18,080
Speaker 1: the claims on behalf of rules like this are always overblown.

102
00:05:18,160 --> 00:05:20,200
Speaker 1: But at the same time, I think the complaints about

103
00:05:20,240 --> 00:05:22,600
Speaker 1: them tend to be overblown as well. So I think

104
00:05:22,600 --> 00:05:24,440
Speaker 1: in many ways it's sort of a tempest in a teapot.

105
00:05:24,480 --> 00:05:26,040
Speaker 1: I mean, I know, a lot of money is at stake,

106
00:05:26,120 --> 00:05:28,400
Speaker 1: a lot of profiting is at stake, But when it

107
00:05:28,400 --> 00:05:31,520
Speaker 1: comes to actual you know, productive activity in the real economy,

108
00:05:31,520 --> 00:05:33,240
Speaker 1: I don't think any of this makes that much difference

109
00:05:33,279 --> 00:05:37,680
Speaker 1: one way or the other. Well, I suppose the Trump

110
00:05:37,720 --> 00:05:40,560
Speaker 1: administration has been has been focused on this, or at

111
00:05:40,600 --> 00:05:44,599
Speaker 1: least the regulators have. There are some other Wall Street

112
00:05:44,680 --> 00:05:49,640
Speaker 1: rules that are awaiting revision, so to speak. Let's talk

113
00:05:49,760 --> 00:05:53,160
Speaker 1: that those a little bit sure sure, So you know,

114
00:05:53,240 --> 00:05:56,640
Speaker 1: one one another kind of top of the lister, you

115
00:05:56,720 --> 00:06:01,000
Speaker 1: might say, has to do with the stress test of banks,

116
00:06:01,040 --> 00:06:03,640
Speaker 1: you know, under the bed stress test reagime. That was

117
00:06:03,680 --> 00:06:05,640
Speaker 1: another one of the sort of hallmarks of the post

118
00:06:05,680 --> 00:06:09,040
Speaker 1: crash reforms during the early Obama years. And you know,

119
00:06:09,080 --> 00:06:12,080
Speaker 1: there's been a lot of discussion about whether the banks

120
00:06:12,120 --> 00:06:15,360
Speaker 1: should be sort of given more guidance in advance as

121
00:06:15,400 --> 00:06:18,040
Speaker 1: to what actually is going to be tested for. Right,

122
00:06:18,400 --> 00:06:21,719
Speaker 1: those who think it's a good idea to allow for that, say, again,

123
00:06:21,880 --> 00:06:23,919
Speaker 1: just like they say in connection with Bulker now that

124
00:06:23,920 --> 00:06:25,760
Speaker 1: they would afford more certainty of the banks, the banks

125
00:06:25,800 --> 00:06:28,480
Speaker 1: would have less uncertainty, and compliance would be easier. On

126
00:06:28,520 --> 00:06:30,800
Speaker 1: the other hands, the counter argument is that you know,

127
00:06:30,960 --> 00:06:32,880
Speaker 1: they you know the old bit about people teaching to

128
00:06:32,920 --> 00:06:35,279
Speaker 1: the test. You know, if people know in advance what

129
00:06:35,400 --> 00:06:37,080
Speaker 1: sorts of questions are going to be on the test,

130
00:06:37,200 --> 00:06:39,520
Speaker 1: and they can kind of gain the systems that were

131
00:06:39,560 --> 00:06:41,719
Speaker 1: to make sure that they pass UM And so it

132
00:06:41,800 --> 00:06:43,960
Speaker 1: might well be that the fundamentals are not as sound

133
00:06:44,040 --> 00:06:48,360
Speaker 1: as they look when banks passed their stress tests if

134
00:06:48,360 --> 00:06:51,240
Speaker 1: it's possible for them basically to kind of again gain

135
00:06:51,320 --> 00:06:53,240
Speaker 1: the system once they know what the questions are going

136
00:06:53,279 --> 00:06:56,719
Speaker 1: to be. So UM, we look to be likely to

137
00:06:56,720 --> 00:06:59,640
Speaker 1: see some significant changes on the stress in the stress

138
00:06:59,640 --> 00:07:02,039
Speaker 1: testing machine very soon, and I actually think that could

139
00:07:02,040 --> 00:07:05,920
Speaker 1: be potentially more momentous than the changes in Bulker. Really, well,

140
00:07:05,920 --> 00:07:08,799
Speaker 1: that'll be intervidual talk about it again then, I'm sure, Bob.

141
00:07:09,160 --> 00:07:12,440
Speaker 1: Thanks so much. That's Robert Hockin of Cornell Law School.

142
00:07:13,280 --> 00:07:16,240
Speaker 1: Thanks for listening to the Bloomberg Law Podcast. You can

143
00:07:16,280 --> 00:07:20,000
Speaker 1: subscribe and listen to the show on Apple Podcasts, SoundCloud,

144
00:07:20,080 --> 00:07:24,000
Speaker 1: and on Bloomberg dot com. Slash podcast I'm June Brosso.

145
00:07:24,440 --> 00:07:28,320
Speaker 1: This is Bloomberg yea