Dealbook’s Andrew Ross Sorkin has a column up on the Volcker Rule.The condensed version: short-term, Sorkin is as worried about the rule as banks are, spends most of the column repeating their arguments against it and then says that despite all these bad things, the Volcker Rule is actually is a good idea in the long-term.
The problems with Sorkin’s argument begin with his total acceptance of JP Morgan CEO Jamie Dimon’s argument against the rule. Dimon, in an interview with Fox Business Network, essentially attacked a version of what the Volcker Rule might have meant to someone who misunderstood it a year ago.
But we’re far beyond the need for a straw man at this point. The Volcker Rule is by now incredibly thorough and deeply complex. We know that because banks keep complaining about how complex it is.
For Dimon to say that it would somehow prohibit brokers from holding inventory is not credible and for him to compare his business to a clothing store selling polka dot dresses is absurd beyond rebuttal. Yet Sorkin simply tosses out these criticisms without contest.
Sorkin does offer a few quotes from Volcker in support of the rule, but he dismisses them because he doesn’t offer sufficient explanation for his position. That’s a criticism he doesn’t level at Dimon, even as the CEO makes a series of unfounded assertions connecting the Volcker rule to testosterone levels and psychiatrists on the trading floor.
Sorkin then goes on to say that under the rule, banks won’t be able to hold any inventory. But that’s not true, and Volcker’s own letter clearly indicated that he expects brokers to continue to hold inventory. The key is that they can’t hold inventory for purely proprietary purposes.
Sorkin also makes the bizarre claim that the Volcker rule would prohibit selling odd lots (orders for shares that are not in round multiples of 100). I’m sure Jamie Dimon stays up at night thinking about big risks to his business and how best to serve clients, but I doubt that the Volcker Rule’s impact on clearing odd lots causes him a moment of insomnia. I hate to be blithe, but there are algorithms for that. And the CEO of E*Trade Jamie Dimon is not.
In attacking the Volcker Rule, Sorkin even brings the criticisms of European regulators into the picture. Right now, I wouldn’t take a single thing a regulator fo the European financial system said at face value. But that’s exactly what Sorkin, just like he did with Dimon, does. He buys their arguments hook, line and sinker and moves on without the slightest hesitation.
This makes no sense. After all, if the Europeans knew the Volcker Rule would negatively impact American banks, wouldn’t they support it, because as Sorkin ominously notes, “companies may now look to overseas firms” to execute trades.
What about the cost of the Volcker rule? Sorkin cites a Sifma funded study putting it at $350 billion. Conceding that this number has been criticised and could be “wildly exaggerated”, Sorkin notes that even half that amount would be substantial.
But since when is the way to make something that is “wildly exaggerated” more conservative to simply cut it in half? Why not cut it by in by a factor of 10 or 100? But even if the wildly exaggerated $350 billion dollar cost were correct, in 2010 alone, the value of shares traded on the NYSE was almost $18 trillion, of which $350 billion is 1.94%. And that’s just one exchange, over one year and only equities. Add in the remaining equities exchanges and the even more massive fixed income, currency and commodities markets and that cost begins to shrink to irrelevancy.
Beyond these issues, the key error in Sorkin’s thinking is that any cost is a bad cost. Yes, banks may not be able to earn specific types of revenue after Volcker. But not all revenue is created equal when it comes to creating systemic risk. In fact, we know that some types of revenue create systemic risk that in turns creates huge social costs that far outweigh the initial gain. Yes, investors may have to bear some very incremental costs. But not all investors are created equal when it comes to trading volumes or creating systemic risk. An incentive for high frequency trading to slow down a bit is not the worst thing.
Even assuming that the Volcker Rule would hurt banks, that’s not a sufficient reason not to move ahead. We’ve long since reached the point where we need to prize lower systemic risk above the earnings performance of a single sector.
At it’s core, Sorkin’s argument boils down to if it’s bad for banks, it’s bad for America. And even if something is good for America in the long-term but might be bad for banks in the short-term, we shouldn’t do it.
You would have thought that in the last few years he’d have been disabused of these assumptions.