Post-Election Thoughts: Incumbency and the Volcker Rule

Regulatory 07 Nov 2012

Well … that’s over with.  It was a good election year for incumbents all around. As of Wednesday morning, it appears that the composition of the House of Representatives will not change greatly as a consequence of Tuesday’s election.  The Republicans will lose some seats net, but they’ll retain their majority and John Boehner will likely retain his Speakership. The ‘Tea Party’ caucus created within the Republican caucus by the election of 2010 remains intact. Heck, even Paul Ryan, the unsuccessful vice presidential candidate, gets to keep his seat in the House of Representatives.

Meanwhile, the Democrats will hold their majority in the Senate and, of course, a Democrat will continue to occupy the White House. In other words, things look a lot like they have looked for the last two years.

As a regular reader of AllAboutAlpha, you dear reader are I submit not surprised by this news. You may be pleased or displeased, but you are not surprised.  Markets seem to have been looking past such a result as this, looking toward the separate issue to which Washington, inclusive of its Congressional lame ducks, may finally now turn in earnest: what to do about the year-end fiscal cliff?

The Volcker Rule

Put even that off for another day, though, and think about a pending and potentially very important piece of regulatory business. If there had been expectations of a Romney election, and now if there were expectations of a Romney administration, then it might be rational for parties in the alternative-investment world in particular to drag their feet on Dodd-Frank, especially on the Volcker Rule mandated therein and related issues of implementation, hoping that both it and they would go away under a new administration. We’re not sure whether it is fair to suggest that anyone has been making such an effort. The actual push-back that administrative agencies have gotten on Dodd-Frank implementation has been within the normal range for contentious rule making proceedings.

In broad outline, the Volcker rule when implemented will restrict banks from using federally insured deposits to engage in proprietary trading, and from investing in or sponsoring private equity funds.  That obviously suggests a number of questions, like “what exactly is prop trading?” And any proposed answer to the first-order questions seems to suggest second-order questions, sending regulators working on the implementing rules into an awkward spiral into complexity, ad creating a lot of room for push backs.

In September, after the nominating conventions were over but before the presidential debates had begun, the acting Chairman of the FDIC, Martin Gruenberg, gave reporters his opinion that the various agencies working on the implementing regs were sticking with their “intention” of having them ready by the end of this year.  One doesn’t have to have more than a minimal dose of skepticism in one’s bones to suspect that this “intention” might have some slippage to it yet, as the various affected interests continue to push back against the proposed details in a number of respects.

Working at the Margins

Heck, the push-back on the Volcker Rule specifically has had a diplomatic dimension.  Certain foreign governments have objected to its extra-territorial impact, since (in the words of a comment from Mexico’s bank regulator), “derivative transactions carried out on U.S. systems and exchanges are an integral part of Mexican financial institutions’ risk management practices, and thus any restriction as a consequence of the enforcement of the Volcker rule would result in greater risk in our financial markets.”

Surely there will be more haggling and haggling to come. In the light of Tuesday’s results, though, it seems sure that something recognizably like the drafts now in play will eventually be implemented. The alternatives investment industry may serve itself best by working to improve the defects of these drafts at the margins.  Dodd-Frank is the law of the land, became so by virtue of the expenditure of considerable legislative capital early in the first term of this administration, and there is no vigorish for the administration in pulling back on this effort now.

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