Lydia DePillis: So, could you just boil down that 325-page letter into a few bullet points for me?
Eric Taylor: If you look at the very end of that letter, we did produce an annex that had suggested language modifications. That's like 10 pages, and it's a summary of really concrete things that we wanted changed.
Akshat Tewary: Those were specific changes to the text of the regulation. If you're looking for a more holistic description, basically we thought there was more leeway in how the rules were written. Our problem was that Section 619 of Dodd-Frank, which is the section that became the Volcker Rule, had numerous exceptions built into it. We were already working with a flawed product, and we have this statute with a lot of exemptions in it that allow proprietary trading to occur. What can we do to strengthen the final product? It's sort of like a triage situation, so that what we come out with is not as bad.
From the beginning, there were numerous exemptions for hedging, market making, repo agreements, customer facing transactions, government securities. But then each one, the language needed to be tuned up, pretty much across the board. A couple areas we didn't comment, because they were okay. So from a summary perspective, most of the aspects needed tightening up to close loopholes, so that's what we tried to suggest.
LD: Was the appointment of Mary Jo White to chair the Securities and Exchange Commission a hopeful sign in terms of the final outcome of the rules?
ET: I think I would take a negative perspective on that.
AT: I would too. She certainly has an industry background -- her credentials, as far as the SEC are concerned, are really from the private side. So that's sort of suspect. We've heard her speeches talk about the SEC needs to have its own agenda with respect to public pressure, which on the one hand sort of makes sense -- you want to have agencies that are independent from political processes -- but at the same time, you don't want them to be blind to what's going on and how their regs are affecting the public. So that was sort of concerning. She was saying: We get pressure from lobbying groups as well as public interest groups, and we don't listen to any of them; we make our decisions, when in reality, it seems pretty clear that lobbying groups have a lot of influence. So I guess you could say we're somewhat guarded. It's not as bad as Larry Summers would've been, but I don't think she's all that different from the norm.
LD: Did you guys do anything to push this besides send letters into the ether?
ET: We met with each regulator after they wrote the rule, and we worked with other interest groups collaboratively through the process.
AT: To get ideas, we had a weekly conference call where we talked about things with a couple other groups. We definitely met with all the regulators once, we had a hearing in Congress for 100 to 200 congressional staff members who at that time were considering re-proposing the Volcker Rule, so we were encouraging them not to do it, to strengthen the rule that already existed. We met with Paul Volcker and Sen. [Jeff] Merkley along the same lines.
LD: Were any of your proposed changes incorporated?
ET: We'll be able to say more about that in the future, the preamble is almost 900 pages, and the actual rule is 71 pages, so we've only been able to look at it from a cursory point of view. There were certainly some things in there where they didn't concede to industry, which was good.
AT: They've cited our suggestions 284 times in the final rule, and in a lot of those contexts they agreed with us, and a lot of the time they disagreed with us. They're not going to say that Occupy said this and we're going to follow it, but we are pretty comforted that they followed at least some of our suggestions. [For comparison, the rule cites the Securities Industry and Financial Markets Association 599 times, Americans for Financial Reform 179 times, and Senator Jeff Merkley 176 times. - ed. note]
LD: What are the things that financial reformers should be happy about?
AT: I think most people agree that the final rule was a little stricter on banks than the proposal was. I think that had a lot to do with the London Whale fiasco from last year. And secondly, the number of times that they cited us suggests that regulators are subject to public oversight. It was heartening to be part of that conversation, and I think it indicates there's potential for that kind of activism going forward.
LD: When you talk about that kind of activism, you had pretty traditional avenues of input, right? Or did you guys do anything unconventional?
AT: So we did do some street protests before the SEC, JPMorgan, Goldman Sachs, that was 2012. And a host of comment letters, letters to Congress, we had a number of petitions on our Web site, which converted into comment letters. I think several thousand of those were considered comment letters for the purposes of the Volcker rule.
LD: What do you see as the big remaining problems?
AT: There's a new exemption that's been created for foreign treasuries. In the proposed rule, there was an exemption just for U.S. government debt. But now in the final rule, because of pressure from the governments of Japan, Canada, and the U.K., they've added a new exemption that an foreign affiliate of a banking entity can now buy or sell foreign government debt. I think that we've seen the euro crisis show that government debt is not necessarily sacrosanct, with Greece and Italy and Spain. So that's certainly troubling, it opens a big avenue for banks to speculate on the risks of foreign governments and their creditworthiness.
ET: I was going to mention the covered funds definition. The statute gave the authorities the right to broaden the covered funds definition to cover things like hedge funds and private equity, and they really didn't. They kept it pretty narrow. We've seen some cases of banks already trying to skirt the Volcker Rule by creating development companies that are basically private investment practices. As far as repo concerns, it's still pretty much there, we had advocated that it be stricken from the final rule. But they did clarify that collateral on repo transactions should not be excluded. Don't know if that's really going to be a significant change though.
AT: And I will say that the compliance and metrics sections seem to be pretty good. There are a good amount of documentary requirements that have been placed especially on the larger banks. So the rules seem to be well attuned to the size of the banks. So small banks without much trading didn't have as much documentary requirements.
ET: Another thing, they did have a CEO certification, I don't think it goes far enough. It requires them to certify that they have put in place processes to comply with the rule, but not to certify that they are complying with the rule.
AT: And that's a positive change from the proposed rule.
LD: What's next for you guys after this? What are the big issues left on the table?
AT: Well, a few things. It seems like the lobbyists will be fighting really hard in court against the proposed rule, so if there's a lawsuit that's filed, they can expect us to file an amicus brief on the other side. And also, the final rule seems to give a lot of discretion in terms of enforcement to the regulatory agencies. So to make sure they're enforcing it in a rigorous manner is going to require some work.
ET: And lawmaking's an ongoing thing, too. We keep seeing bills show up in Congress that try to undo various aspects of Dodd-Frank, the Volcker Rule, whatever, and those things need to be continuously combated.