Tomorrow, Hillary Clinton will unveil her proposals on financial regulation and systemic risk in the American economy. One of those proposals, according to campaign officials, will be a plan to strengthen the existing version of the Volcker Rule along several dimensions in order to close what critics see as loopholes in a rule much loved by financial reformers but at times reluctantly implemented.
The idea of the original Volcker Rule is to prevent FDIC-insured financial institutions from engaging in speculative trading with their own money. The fear is that traders are able to make "heads, I win; tails, the government loses" bets where profitable trades lead to big bonuses but unprofitable trades lead to government bailouts.
But critics believe the Volcker Rule is unnecessary and unenforceable, while even its supporters think the current version of the rule is shot through with loopholes.
Clinton is aiming to close several of the most egregious loopholes, and is more generally promising an attitude of regulatory vigilance on this matter.
Hillary Clinton's Volcker Rule proposal, explained
As described by campaign officials, Clinton's proposal will entail the following changes to the Volcker Rule:
- Eliminate the rule allowing banks to invest up to 3 percent of their capital in hedge funds and other speculative investment vehicles. (This was inserted at the behest of then-Sen. Scott Brown as one of his conditions for backing the overall Dodd-Frank package.)
- Reinstate Section 716 of Dodd-Frank, which was repealed last winter as part of the CRomnibus government funding measure.
- Last, and perhaps most importantly, tighten the regulatory definition of what kinds of investment vehicles are considered capped by the 3 percent rule.
It depends on what the meaning of "hedge fund" is
The first two prongs of Clinton's plan would require action by Congress, which is unlikely to be forthcoming as long as the House of Representatives is controlled by the GOP; they're more important as statements of intent, designed to indicate where Clinton stands on the subject.
Operationally speaking, it's the third prong of her program she can really implement.
The basic issue here is that even if banks are barred from engaging in speculative trading, they can de facto accomplish the same thing by, for example, investing in a hedge fund that engages in speculative trading. But even though "hedge fund" is a word that people use a lot, it lacks a precise legal meaning.
This gets a bit technical, but it's important: For the purposes of Volcker Rule implementation, rule writers settled on the idea that investing in funds that take advantage of the exclusions contained in Section 3(c)(1) or Section 3(c)(7) of the 1940 Investment Company Act is what should be limited.
But a Clinton campaign official says that creative banks "are already structuring their activities to avoid the Volcker Rule's restrictions" by investing in other kinds of funds that are governed by slightly different SEC exemptions.
The campaign is, essentially, promising to "fully enforce the Volcker rule in a manner that stays true to its underlying goals — ensuring that banks can't avoid its prohibitions on risky activities by using evasive business structures."
A question of commitment
These proposals will all come as music to the ears of financial reformers, who have long feared that on some level the key players in the Obama administration never really favored the Volcker Rule and thus had no particular intention of trying to enforce it in a meaningful way.
By the same token, to the extent that Obama's critics on the left are suspicious of Hillary Clinton, it is because they believe — largely based on the policies of her husband's administration — that she will appoint a similar team of people to key regulatory roles. The Clinton campaign, while going out of its way not to criticize the Obama team explicitly, is attempting to quietly signal a greater level of commitment to the Volcker Rule.
The proof will ultimately have to be in the regulatory pudding, but this is the sort of step that financial reformers are looking for from the Clinton campaign.