WEBVTT - Wall Street Gets A Win With Volcker Rule Revamp

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<v Speaker 1>Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

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<v Speaker 1>day we bring you insight and analysis into the most

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<v Speaker 1>important legal news of the day. You can find more

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<v Speaker 1>and on Bloomberg dot com slash podcasts. A Trump administration

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<v Speaker 1>de regulatory priority will take effect on January one, as

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<v Speaker 1>two regulators ease the Vocal Rules controversial ban on banks

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<v Speaker 1>making speculative investments. It's called Vocer two point no. Joining

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<v Speaker 1>me as Robert Hockety, professor at Cornell Law School, Bob

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<v Speaker 1>tell us about the biggest changes that were approved with

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<v Speaker 1>this new rule, I do, yeah. This is the principle change.

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<v Speaker 1>I think, the one that this most movie most welcome

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<v Speaker 1>on the front of the banks is a change in

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<v Speaker 1>the presumption that was part of the Vocal rule before.

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<v Speaker 1>So previously, the presumptions that you were if you were

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<v Speaker 1>engaging in short term trading, it was probably speculative other

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<v Speaker 1>than hedging, and it was up to you to rebut

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<v Speaker 1>that presumption, so basically to prove that you are innocent,

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<v Speaker 1>so to speak, or that you were merely hedging in

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<v Speaker 1>other words, rather than speculating. Uh, that presumption will go

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<v Speaker 1>by the wayside now, and I think that that's probably

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<v Speaker 1>going to elicit the greatest sort of sigh of relief

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<v Speaker 1>on the part of the banks. How much of a

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<v Speaker 1>victory is this for the banks? It's it's easy to

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<v Speaker 1>overstate the degree of the victory, but but it's to

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<v Speaker 1>some extent going to determine. I mean, it's going to

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<v Speaker 1>sort of depend on what what what. The actual cause

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<v Speaker 1>of the sort of cutback and proprietary trading over the

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<v Speaker 1>last few years has been right, so as you know,

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<v Speaker 1>the proprietary trading books of the larger banks are much

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<v Speaker 1>smaller than they were before Vulker went into effect. But

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<v Speaker 1>there's some sort of uncertainty I guess we would say

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<v Speaker 1>as to whether the Volcan the rule itself was a

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<v Speaker 1>reason for that, or whether there are other reasons that

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<v Speaker 1>sound more in sort of changes in the industry. If

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<v Speaker 1>it's the latter than the change in Vulcar isn't going

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<v Speaker 1>to make much difference. If, on the other hand, the

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<v Speaker 1>Vulcar rule itself was an important part of that story, well,

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<v Speaker 1>then of course it could bring about an up search

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<v Speaker 1>in proprietary trading of a kind that was quite common

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<v Speaker 1>of course, before one Democratic fd i C board member

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<v Speaker 1>warned that the rollback could again endanger the financial system

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<v Speaker 1>by allowing lenders to recklessly trade hundreds of billions of

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<v Speaker 1>dollars in risky assets as they did before the financial crisis.

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<v Speaker 1>Do you agree with that? Well, I understand where Mr

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<v Speaker 1>Grinberg's coming from on that, But again, whether he's right

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<v Speaker 1>or not sort of depends again on what the cause

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<v Speaker 1>of the decline and proprietary trading since has been. If,

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<v Speaker 1>again that was owing to the vocal rule itself, that

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<v Speaker 1>he could very well be right. If, on the other hand,

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<v Speaker 1>there have just been changes in the industry that makes

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<v Speaker 1>proprietary proprietary trading less attractive than it used to be,

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<v Speaker 1>then it might very well be that his alarm it's

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<v Speaker 1>not quite as justified. Does the new rule give lenders

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<v Speaker 1>a better picture of what trades are prohibited? I think

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<v Speaker 1>it resolves a certain kind of uncertainty on their part, right,

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<v Speaker 1>I think. And it's not so much an uncertainty as

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<v Speaker 1>to whether you know their trades a proprietary or not,

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<v Speaker 1>because they would actually whether the trades are specultive or not,

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<v Speaker 1>because ultimately they know that. But what it doesn't do is.

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<v Speaker 1>I think it resolved some uncertainty that they would be

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<v Speaker 1>experiencing as to whether the regulators would be likely to

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<v Speaker 1>find that to be the case or not. And in

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<v Speaker 1>that sense it does resolve in uncertainty that's probably helpful

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<v Speaker 1>to them. And what about compliance costs, Well, this ease

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<v Speaker 1>some of the compliance costs. It should make compliance a

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<v Speaker 1>little bit less costly because you're not as concerned with

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<v Speaker 1>proving what your motives were engaging in the particular trades

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<v Speaker 1>that you were engaging. And in other words, the fact

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<v Speaker 1>that the presumption of guilt, so to speak, is being

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<v Speaker 1>removed itself makes it easier to comply because you don't

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<v Speaker 1>have to do as much proving as you would otherwise

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<v Speaker 1>have had to do. And um, do you anticipate that

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<v Speaker 1>there might there will be more increased investments for the banks.

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<v Speaker 1>I'm a little kept to cool about that, June, but

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<v Speaker 1>because I really don't think that the degree of additional

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<v Speaker 1>liquidity that comes through proprietary trading of the science of

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<v Speaker 1>the banks do really makes that much difference to the

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<v Speaker 1>actual investing that they do. It makes a difference to

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<v Speaker 1>the trading that they do. The trading is the secondary

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<v Speaker 1>market activity of course, and investing is a somewhat different

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<v Speaker 1>sort of operations. And I'm actually skeptical that the sort

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<v Speaker 1>of additional degree of liquidity that might be provided by

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<v Speaker 1>the additional degree of trading that might be engaged in

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<v Speaker 1>is going to make any serious difference to the amount

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<v Speaker 1>of investing. And I think the amount of investing ultimately

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<v Speaker 1>rides on what the prospects of adding value to the

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<v Speaker 1>primary economy are, and you know, that's really a matter

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<v Speaker 1>of the real economy rather than the financial economy. So

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<v Speaker 1>then you think that it's sort of the complaints about

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<v Speaker 1>this from some regulators are are overblown. I think they

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<v Speaker 1>probably are overblown. Um, I think the complaints about the

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<v Speaker 1>rule being in existence at all were very much overblown.

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<v Speaker 1>But I also think that the complaints about easing up

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<v Speaker 1>on the rule are overblown. Basically, this is a so

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<v Speaker 1>called This is a form of so called smart regulation

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<v Speaker 1>that tends to be sort of too clever by half.

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<v Speaker 1>I think those who sort of propound things like this

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<v Speaker 1>rather than more kind of bright line rules like the

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<v Speaker 1>Glass Equal Act used to have in place. Um, you know,

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<v Speaker 1>the claims on behalf of rules like this are always overblown.

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<v Speaker 1>But at the same time, I think the complaints about

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<v Speaker 1>them tend to be overblown as well. So I think

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<v Speaker 1>in many ways it's sort of a tempest in a teapot.

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<v Speaker 1>I mean, I know, a lot of money is at stake,

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<v Speaker 1>a lot of profiting is at stake, But when it

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<v Speaker 1>comes to actual you know, productive activity in the real economy,

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<v Speaker 1>I don't think any of this makes that much difference

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<v Speaker 1>one way or the other. Well, I suppose the Trump

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<v Speaker 1>administration has been has been focused on this, or at

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<v Speaker 1>least the regulators have. There are some other Wall Street

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<v Speaker 1>rules that are awaiting revision, so to speak. Let's talk

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<v Speaker 1>that those a little bit sure sure, So you know,

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<v Speaker 1>one one another kind of top of the lister, you

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<v Speaker 1>might say, has to do with the stress test of banks,

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<v Speaker 1>you know, under the bed stress test reagime. That was

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<v Speaker 1>another one of the sort of hallmarks of the post

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<v Speaker 1>crash reforms during the early Obama years. And you know,

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<v Speaker 1>there's been a lot of discussion about whether the banks

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<v Speaker 1>should be sort of given more guidance in advance as

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<v Speaker 1>to what actually is going to be tested for. Right,

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<v Speaker 1>those who think it's a good idea to allow for that, say, again,

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<v Speaker 1>just like they say in connection with Bulker now that

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<v Speaker 1>they would afford more certainty of the banks, the banks

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<v Speaker 1>would have less uncertainty, and compliance would be easier. On

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<v Speaker 1>the other hands, the counter argument is that you know,

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<v Speaker 1>they you know the old bit about people teaching to

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<v Speaker 1>the test. You know, if people know in advance what

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<v Speaker 1>sorts of questions are going to be on the test,

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<v Speaker 1>and they can kind of gain the systems that were

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<v Speaker 1>to make sure that they pass UM And so it

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<v Speaker 1>might well be that the fundamentals are not as sound

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<v Speaker 1>as they look when banks passed their stress tests if

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<v Speaker 1>it's possible for them basically to kind of again gain

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<v Speaker 1>the system once they know what the questions are going

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<v Speaker 1>to be. So UM, we look to be likely to

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<v Speaker 1>see some significant changes on the stress in the stress

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<v Speaker 1>testing machine very soon, and I actually think that could

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<v Speaker 1>be potentially more momentous than the changes in Bulker. Really, well,

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<v Speaker 1>that'll be intervidual talk about it again then, I'm sure, Bob.

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<v Speaker 1>Thanks so much. That's Robert Hockin of Cornell Law School.

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<v Speaker 1>Thanks for listening to the Bloomberg Law Podcast. You can

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<v Speaker 1>subscribe and listen to the show on Apple Podcasts, SoundCloud,

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<v Speaker 1>and on Bloomberg dot com. Slash podcast I'm June Brosso.

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<v Speaker 1>This is Bloomberg yea