The Volcker Rule doesn’t go into effect until 2015, but that hasn’t stopped big bankers and their supporters in Washington from trying to undermine it.
The latest fight involves another complex Wall Street creation, a financial instrument known as a collateralized loan obligation.
Big banks want to be allowed to own them
Big banks want to be allowed to own them
but regulators say such holdings can be
hazardous and may allow the banks to
evade the Volcker Rule’s prohibition on risky trading.
There have been countless battles over the
Volcker Rule since it was first conceptualized
in the Dodd-Frank law in 2010. Paul A. Volcker,
the former Federal Reserve chairman for whom
the rule is named, hasn’t talked about most of
these fights, but this one is important enough that
he has come forward to discuss it.
What are collateralized loan obligations, or C.L.O.s?
Translated into simple English, they are bundles of
mostly commercial loans that are sold in various pieces
to investors. They are similar to collateralized debt obligations,
or C.D.O.s — those instruments that imperiled so many
institutions in 2008 — but C.L.O.s are simpler and in some
cases less risky. The loans in C.L.O.s provide money to
companies, many of them subject to leveraged
buyouts, that might not receive bank funding.
companies, many of them subject to leveraged
buyouts, that might not receive bank funding.
Some $431 billion worth of C.L.O.s are currently
outstanding, according to the most recent figures
from the Securities Industry and Financial Markets
Association. Roughly $150 billion worth were issued
before 2009. That group represents the riskiest
securities in the asset class, regulators say.
Another $150 billion in C.L.O.s, issued after 2009,
contain fewer problematic assets; those remaining,
raised after the pending Volcker Rule restrictions
had been announced, are viewed by regulators as
the least risky of all.
outstanding, according to the most recent figures
from the Securities Industry and Financial Markets
Association. Roughly $150 billion worth were issued
before 2009. That group represents the riskiest
securities in the asset class, regulators say.
Another $150 billion in C.L.O.s, issued after 2009,
contain fewer problematic assets; those remaining,
raised after the pending Volcker Rule restrictions
had been announced, are viewed by regulators as
the least risky of all.
Insurance companies, pension funds and foreign banks
own most C.L.O.s. But large United States banks hold
an estimated $75 billion worth, and would have to divest
many of them under the Volcker Rule. Being forced to
sell these holdings is what the banks find objectionable.
own most C.L.O.s. But large United States banks hold
an estimated $75 billion worth, and would have to divest
many of them under the Volcker Rule. Being forced to
sell these holdings is what the banks find objectionable.
Under the rule, banks are not allowed to have ownership
stakes or relationships with hedge funds or private equity
firms. Many C.L.O.s are issued and overseen by hedge
funds and private equity firms, though, making C.L.O.s
just the kind of trading vehicles the Volcker Rule intended
stakes or relationships with hedge funds or private equity
firms. Many C.L.O.s are issued and overseen by hedge
funds and private equity firms, though, making C.L.O.s
just the kind of trading vehicles the Volcker Rule intended
to exorcise from bank balance sheets.
Not all C.L.O.s are off limits under the Volcker Rule,
which lets banks hold them if the asset contains only
commercial loans throughout the holding period. This
means that banks cannot own C.L.O.s if they contain
bonds, equity interests or other assets.
which lets banks hold them if the asset contains only
commercial loans throughout the holding period. This
means that banks cannot own C.L.O.s if they contain
bonds, equity interests or other assets.
Regulators were justified in setting these limits. Bonds,
equity investments and other assets can be riskier than
relatively simple commercial loans, they concluded, and
could allow for the kind of risky trading that the
equity investments and other assets can be riskier than
relatively simple commercial loans, they concluded, and
could allow for the kind of risky trading that the
Volcker Rule was trying to prohibit.
Recall that the Volcker Rule was intended to bar banks
with insured deposits from making large and risky trading
bets. The rule was lawmakers’ attempt to reinstate some
of the taxpayer protections
with insured deposits from making large and risky trading
bets. The rule was lawmakers’ attempt to reinstate some
of the taxpayer protections
lost when Congress gutted theGlass-Steagall Act in 1999.
But the big bank crowd contends that regulators have
overreached. At a January hearing convened by the House
Financial Services Committee, Jeb Hensarling, a Texas
Republican who is its chairman, called the Volcker Rule
a job destroyer that “will harm numerous of our capital
markets: equity, joint ventures, C.D.O., venture capital
and especially the C.L.O. market.”
overreached. At a January hearing convened by the House
Financial Services Committee, Jeb Hensarling, a Texas
Republican who is its chairman, called the Volcker Rule
a job destroyer that “will harm numerous of our capital
markets: equity, joint ventures, C.D.O., venture capital
and especially the C.L.O. market.”
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