Posted Apr 2, 2014 by Martin Armstrong
The problem with those in government is simple – they are delusional. These people like to think they have power and the world kisses their feet. They assume if they write a law, it will be followed. But like Obamacare that required everyone must have maternity leave even if they were 60, the law-makers remain ignorant of the real world out there, the same is true of the Volcker Rule that took effect on a most appropriate day – April Fools. Everything is moving into the world of shadow-banking right down to commodity ownership and hedging.
The Volcker Rule refers to § 619 (12 U.S.C. § 1851) of the Dodd–Frank Wall Street Reform and Consumer Protection Act, originally proposed by former US Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers. Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. This was correct since they were shorting Lehman and Bear Stearns in the classic eat your own game.
The Volcker rule is a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank’s own accounts, although a number of exceptions to this ban were included in the Dodd-Frank law. The rule’s provisions were scheduled to be implemented as a part of Dodd-Frank on July 21, 2012, with preceding ramifications, but were delayed. On December 10, 2013, the necessary agencies approved watered-down regulations implementing the rule, which were scheduled to go into effect April 1, 2014. On January 14, 2014, after a lawsuit by community banks over provisions concerning specialized securities, revised final regulations were adopted.
The Volcker Rule limits banks’ speculative investments and goes into effect April 1, 2014. There has probably already been quite a bit of adjustment to bank portfolios, but most of this is simply transferring to the shadow-banking sector; some they still own directly, while others are moving to the hedge-fund community.
I have warned that the proprietary trading on the money center banks turned on schedule and the banks are in for a serious decline in the years ahead. Jamie Dimon’s closest aide at J.P. Morgan, James Cavanaugh, left JP Morgan for the Carlyle Group – a private equity firm. Cavanaugh was considered Dimon’s heir apparent. He is jumping ship because the shadow-banking is rising as the money-center banks decline.