Debunking the Chatter: The Truth about Wall Street’s Volcker Rule Assault


In 1912, Congress formed the “Pujo Committee” to investigate Wall Street’s so-called “money trust,” and its undue power over American finance. In response, J. Pierpont Morgan (one of the most powerful bankers of the 20th century) reluctantly launched a public relations offensive on behalf of his embattled bank. Prior to the Pujo investigation, Pierpont had never even bothered to hire a publicist. But the bank changed their strategy as scrutiny mounted. As the book “The House of Morgan” chronicles, they “laid out a secret plan…that would govern Morgan public relations for a generation.” More than a century later, such PR offensives remain essential to advancing the interests of Wall Street in Congress.

And they still pay off.

A 1911 cartoon from Puck Magazine showing a tiny Uncle Sam and an enormous J.Pierpont Morgan lampoons the banker’s outsized influence.

After winning big by getting a Wall Street-reform gutting provision included in the 2014 year-end government spending bill, the big banks were not content to take a victory lap. As one of the first acts after convening the 114th Congress, House Republicans hurried to provide yet more favors to the biggest banks.

H.R. 37, which the Republicans brought to the House floor literally 24 hours after the Members took their oath of office, is an 11-bill hodgepodge of financial deregulation. The most significant part of the legislation takes aim at one part of the Volcker Rule, a law meant to stop deposit-taking banks from engaging in speculative trading, or investing in risky enterprises like hedge and private equity funds.

H.R. 37 would give banks an extra two years to divest of certain investments known as “collateralized loan obligations,” which are securitized pools of leveraged loans, often juiced with some non-loans thrown into the mix (often derivatives or bonds). The CLOs, as they’re known, are backed by leveraged loans often issued by private equity firms to facilitate corporate buyouts. The bill mostly benefits JP Morgan, Wells Fargo, and Citigroup, who own 66% of all U.S. bank-held CLOs.

Banks have already had three years of extensions granted by the Fed: they currently have until 2017 to sell off anything the Volcker Rule now prohibits them from owning. But with House Republicans, and some Democrats, willing to play ball, the banks keep using their surrogates to ask for more.

This brazenness hasn’t gone unnoticed: Banks earned a number of negative headlines at both national outlets and local papers. In response, like J. Pierpont Morgan before them, they have dispatched their PR-machine to fight back. Materials circulated on behalf of this bill claim the concerns about it are “myths” that have “clouded” reasonable discussion. But a close examination of the bank-friendly factsheets and media talking points shows it’s actually the banks and their surrogates who are clouding the issue with mythologies.

Here’s a brief debunking of some defenses made of H.R. 37.

A Wall Street PR Firm’s…Misleading PR

A number of bank lobbying groups, led by Tony Fratto’s Hamilton Place Strategies, distributed lobbying materials on behalf of the bill, and managed to get friendly shout-outs for their talking points in bank-friendly publications like Politico’s Morning Money.

The Hamilton materials say a lot of things that aren’t accurate, most notably, that banks would see $3.6 billion worth of losses if forced to sell their CLO holdings. In order to give the patina of credibility, Fratto’s group attributes the $3.6 billion figure to the Office of the Comptroller of the Currency (OCC), a banking regulator.

After poking around a bit to find the potential source of the number, it seems like the figure comes from the OCC’s economic analysis of the “costs” of the Volcker Rule. And upon a cursory examination, the $3.6 billion figure in the bank talking points bears no connection to any observable reality.

First, the OCC says the costs of the Volcker Rule are hard to know, so instead of a specific number, they supplied a range. That range spans from literally zero dollars, up to $3.6 billion as the maximum possible cost. So saying, as Hamilton Place did, that “the OCC estimated that losses from forced divestitures could lead to $3.6 billion in losses” amounts to taking the most bank-friendly extreme of the OCC’s total range.

From the OCC’s Volcker Rule analysis

Secondly, the OCC’s estimate applies to a number of structured products that banks will have to sell off because of Volcker, so attributing all the costs only to CLO sell-offs defies logic. Not to mention that the OCC’s analysis came out before the Federal Reserve, in April of this year, granted their extension of the Volcker Rule to 2017. And even if you take the cost estimates hyped by bank flacks at face value, the costs are dramatically concentrated among the 7 largest banks, with the OCC estimating those banks will bear between 100% and 67% of the costs, depending on the year:

From the OCC’s Volcker Rule analysis

Disregarding the factual inaccuracies of the $3.6 billion figure, it’s also worth pointing out that the industry’s hyperventilating about the potential losses is a little rich given their previous advocacy. After all, it was Hamilton’s Fratto himself that claimed that JP Morgan Chase’s London Whale scandal — in which one single bank lost $6 billion in short order on one single trade — was no big deal:

A Trade Group Demonizes the Hedge Funds It Represents

In addition to Fratto’s group, others in the industry have made a concerted push to blunt the impact of the Elizabeth Warren wing of the party’s ascendancy, sometimes even taking on a tone of populist indignance to do so. In one article in The Hill, in particular, the Loan Syndications and Trading Association (LSTA) insinuates that Democrats’ opposition to the pro-bank bill was merely an effort to prop up the rival hedge fund industry:

“Is a transfer of wealth to hedge funds what the Volcker Rule intended?” said Meredith Coffey, an executive vice president at the Loan Syndications and Trading Association, a New York City-based CLO loan trade industry group.

First, it’s a little weird to allege that Democrats, who passed the Volcker Rule in order to stop banks’ investment in hedge funds, are now opposing H.R. 37 in order to…enrich hedge funds, . But beyond that, Coffey’s anger over this “transfer of wealth” is curious, as her trade group represents not just bank-owners of CLOs, but — you guessed it — hedge funds, too. A cursory look at their membership shows a healthy list of hedge funds, ranging from Magnetar, Och-Ziff, and Paul Singer’s Elliot Management Corporation, to the legendary Paulson & Co. I’m curious to know what LSTA’s hedge fund members make of fact that they’re being demonized in order to justify pro-bank legislation.

Republicans Cry “Firesale,” While Pouring Gasoline

Republican House Members also ate up the bank talking points. The debate on the House floor invoked the specter of “firesales” of CLOs (language borrowed from Hamilton’s materials), as banks scramble to sell-off these instruments before the 2017 deadline. For example, Rep. Andy Barr (R-KY) noted during the House floor debate:

“So it seems to me that the medicine being prescribed by the Volcker rule, forcing banks to sell billions of dollars of CLO paper in a fire-sale scenario…would be a far more damaging result to jobs and the economy than the perceived disease.”

But the firesale argument is undermined by the text of H.R. 37 itself, which allows banks to accumulate new CLOs until 2019. That’s right, while the Federal Reserve’s extension basically said, “if you like your CLO, you can keep your CLO,” the Republican bill would let banks increase their CLO holdings until the extended 2019 date.

Also, the argument ignores the fact that sell-offs aren’t inevitable. Banks can — and have — undertaken modest restructurings of their CLOs to make them Volcker-compliant. A quick Google search reveals many deals that have amended their structures, and money managers have bragged about it to get more business.

Perhaps the perverse but clever point of H.R. 37 is for banks to increase their CLO holdings, so that they can argue for yet another extension when 2019 rolls around.

It is the “death by a thousand cuts” approach to ensuring the Volcker Rule is never fully implemented.

In his 1913 book, “Banking, Currency and the Money Trust,” Charles Lindbergh alleged that the Wall Street elite “wielded their power over the newspapers for the very purpose of beguiling the public.” And while much media coverage of H.R. 37 has been damaging for the banks, they are still able to land their talking points at large outlets, and to have them spoken by Members of Congress.

JP Morgan’s CEO Jamie Dimon, the most central descendant of the House of Morgan legacy, recently griped to Bloomberg that U.S. regulators place banks like his “under assault.” But in reality, it is the 2010 Wall Street Reform and Consumer Protection Act that faces an ongoing assault — both by Wall Street’s allies in Congress, and those in the media who continue to be beguiled by the output of Wall Street’s PR apparatus.


Image credit: Ian Caroll (CC BY 2.0)

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