President Trump, listen to candidate Trump and keep Volcker Rule

“If he’s happy, I’m happy,” President Trump said during a 2015 interview in reference to former Federal Reserve Chairman Paul Volcker and the Volcker Rule. 

It seems like ancient history now, but President Trump campaigned on holding Wall Street accountable, even going so far as to embrace the Glass-Steagall Act, a Depression-era law that separated investment from commercial banking. Now, just months after being sworn in, the Trump administration is reportedly pushing the federal financial regulators to gut a modern version of the very law they once praised, the Volcker Rule. 

{mosads}The Wall Street banks at the center of the financial crisis have argued for years that the reforms put in place after the crisis were holding them — and the economy — back. The Volcker Rule, which prohibits banks and their affiliates from making certain types of high-risk bets, was one of the most critical elements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and it has been the Wall Street banks’ top target.

The banks and their allies have used seemingly every tool at their disposal to block, weaken or repeal the Volcker Rule. Now, with congressional efforts to repeal the rule all but stopped in their tracks, the Trump administration and its regulators are looking for ways to satiate the banks’ desires. They shouldn’t. 

The Volcker Rule was a bold but targeted solution to one of the key causes of the financial crisis: proprietary trading. From the 1930s until the late 1990s, banks with insured deposits (and other support from the federal government) were largely prohibited from taking risks in the securities markets by what was known as the Glass-Steagall Act.

As markets became increasingly integrated, and deregulatory fervor loosened the rules, the line between banks that make deposits and firms that make hedge fund-like bets became blurred.

Fast forward a few years, and Wall Street banks had placed large, proprietary bets on a wide range of assets, including toxic mortgage-related securities, commercial real estate bonds, private equity interests and more. When those assets’ prices collapsed, the banks were suddenly at risk of collapsing too.

But this wasn’t all about risk. The bipartisan Senate Permanent Subcommittee on Investigations and the congressionally-created Financial Crisis Inquiry Commission uncovered that some of these same firms were actively selling garbage to their customers while also betting on their customers’ misfortune. These actions were a deep breach of trust that offended many — including many honest people in the financial services industry. 

The U.S. taxpayers spent trillions of dollars in more than a half-dozen complex programs to bail out the markets and both banks and investment banks alike — all of which are now squarely within the federal safety net. Aside from the billions of taxpayer dollars put at risk, millions of American families and businesses suffered. While the big banks were bailed out, underwater homeowners were not. Half of all middle-class household wealth was wiped away.

As staffers to the two authors of the Volcker Rule — Senators Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.)  — we worked in Congress to identify what went wrong and what needed to be done to fix it. The answer was clear: Adopt a modern version of the Glass-Steagall Act that attacked the big bets that had gone horribly awry.

Banning proprietary trading from the nation’s core financial institutions — and thus separating out the big betting activities from customer-serving banking — not only would reduce the risk of blow-up and bailout, but would weed-out the serious conflicts of interest between banks and their clients.

Enacting and then implementing the rule has been an arduous, public process, involving numerous congressional hearings, dozens of drafts, hundreds of meetings and thousands of comment letters. The Volcker Rule  rightly enjoyed the strong support of ordinary Americans, members of Congress, a bipartisan group of former Treasury secretaries, the Independent Community Bankers of America and dozens of other groups and organizations across of the political spectrum. 

Even while the will of the American people, Congress, the Obama administration and regulators was clear, so too was the desire of some banks to keep their risky businesses. Yet, more than seven years after the Volcker Rule was enacted, there is zero evidence or economic basis for any exception, carve-out or other weakening. Time after time, industry-funded studies or predictions that the sky would fall have been disproven by reality. 

To be clear, the Volcker Rule isn’t perfect. But it’s also working. We haven’t seen the wild swings in in profits and losses that once plagued the big-betting banks. Bank revenues and profits are generally higher than ever.

Overall metrics of market performance, such as corporate debt issuances are near all-time highs, and key measures of corporate bond market liquidity are well within historical norms. Lending is doing fine. 

The American people have still not fully recovered from the financial crisis. Turning back the clock and re-creating the conditions that led to a financial collapse and trillions of dollars in big bank bailouts isn’t going to help. At least on the Volcker Rule, we suggest the Trump administration listen to candidate Trump. 

Andy Green is managing director of economic policy at the Center for American Progress, a progressive public policy research and advocacy organization. He is a former counsel to Senator Jeff Merkley and SEC Commissioner Kara Stein. Tyler Gellasch is a principal at Myrtle Makena, which provides consulting services on capital markets and tax matters. He formerly worked as senior counsel to the Permanent Subcommittee on Investigations, counsel to Senator Carl Levin and counsel to SEC Commissioner Kara Stein.

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