A Flawed Attack on the Volcker Rule by IHS CERA -- Paid for by Morgan Stanley
The economic consulting business is experiencing quite a boom. A continuing battle rages between the banks and the public’s interests over implementation of the Volcker Rule provisions of the Dodd-Frank financial sector reform legislation. Industry lobbying efforts have seized on a tried-and-true tactic for delaying and perhaps defeating needed reforms, stealing a page from the tobacco industry playbook. The K Street crowd has flooded regulators, Congress and the media with study after study that warn of the horrors of limiting the derivatives and securities trading businesses of banks, all prepared by consultants on their payroll.
The Volcker Rule generally prohibits banks that are federally insured and have access to the Fed window from engaging in proprietary trading and direct participation in hedge funds. The idea is that, if banks that are supported by the federal safety net engage in dangerous activities that imperil their balance sheets, the risks of another bailout are vastly higher. Additionally, the derivatives and securities markets are distorted by the subsidized, government supported capital made available to an oligopoly of powerful trading firms.
The most recent “expert study” attacking the Volcker Rule was proffered the energy consulting firm IHS CERA. The study is more than 100 pages long, though disappointingly repetitive for those of us who have read each one of these things. It is distinguishable from similar studies issued over the last few months primarily by its colorful photographs of refineries and drilling rigs. It has two similarities to prior efforts, however. First, it forecasts large costs of regulation that might be expected to catch the attention of target audiences. The second similarity is that the defined purpose of the study and its basic assumptions guarantee that the results are both eye-catching and irrelevant to the pertinent issues.
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