Why the Volcker Rule Is Crucial to the 99%

By Occupy the SEC, Guardian UK

22 February 12

he United States aspires to democracy, but no true democracy is attainable when the process is determined by economic power. Accordingly, Occupy the SEC is delighted to participate in the public comment process for the implementation of Section 619 of the Dodd-Frank Act by the SEC, Federal Reserve, OCC and FDIC ("the Agencies"). This country's governing principles of transparency and due process mandate that any rules implemented by our regulators comport with the democratically-elected legislature's intention to protect the people from the widespread banking abuses and excesses of the recent past.

We believe the Volcker Rule is important to the future of the banking industry and, if strongly enforced, will help move our financial system in a more fair, transparent, and sustainable direction. Prohibiting banking entities from engaging in proprietary trading and banning their sponsorship of covered funds are key elements to regulating the financial system and giving force to the Dodd-Frank Act.

At its core, the Volcker Rule seeks to make sure that if a banking entity fails, it does not bring down the whole system with it. We appreciate the momentous challenges that the agencies continue to face in effectively implementing the rule, and we present these comments to assist them in their task. […]

Proprietary trading by large-scale banks was a principal cause of the recent financial crisis (pdf), and, if left unchecked, it has the potential to cause even worse crises in the future. In the words of a banking insider, Michael Madden, a former Lehman Brothers executive:

"Proprietary trading played a big role in manufacturing the CDOs and other instruments that were at the heart of the financial crisis. … If firms weren't able to buy up the parts of these deals that wouldn't sell … the game would have stopped a lot sooner."

The interconnectedness of banks under the shadow banking system had the effect of magnifying one bank's proprietary trading losses (eg, Lehman Brothers) and transferring them across the market as a whole. Lobbyists' exhortations notwithstanding, proprietary trading by government-backstopped banks is a fundamentally speculative and risky phenomenon that must be circumscribed.

During the legislative process, the Volcker Rule was woefully enfeebled by the addition of numerous loopholes and exceptions. The banking lobby exerted inordinate influence on Congress and succeeded in diluting the statute, despite the catastrophic failures that bank policies have produced and continue to produce. Nevertheless, the Volcker Rule, in its current statutory form still has the potential to rein in certain speculative trading practices by banking entities that enjoy ready access to customer deposits and virtually limitless funding through various Federal Reserve programs.

We encourage the agencies to stand strong against the flood of deregulatory pressure that they have and will continue to face in connection with their implementation of the Volcker Rule. A vigorously implemented and enforced Volcker Rule would serve as insurance against the need for future bank bailouts funded by taxpayers. The agencies must take advantage of this historic opportunity to protect the financial position of the average person living in the United States.

• This is an edited excerpt of opening remarks from Occupy the SEC's 325-page submission to the SEC, FDIC, the Federal Reserve and the OCC, which comments on the notice of proposed rulemaking for the Volcker Rule. The full text of the letter is available online and as a downloadable pdf.