Here are news stories from the week that were easy to miss, but may have some lasting impact.
A Lesson in Obfuscation – The Nearly Complete Volcker Rule
Sometimes simple things can be so hard. Ever try to put a sweater on a toddler? They can also be extremely frustrating. Take the Dodd-Frank “Volcker Rule” for instance. Simply put, the rule states that banks are banned from making investment bets for their own accounts. Simple, right? Gradually as Dodd-Frank wound its way through the congress certain exceptions were made and the rule relaxed, but even in its more lenient iteration the rule remains bogged down. Regulators are hopeful that the rule may be complete by the end of the year – a mere 3.5 years in the works. The final draft of the rule proposed by former Fed Chair Volcker in a page and a half outline will finally reach completion – all 900 pages of it! Admittedly, there are some twisty bits, like when it comes to defining terms like “hedging” and “private equity.” There appears to be light at the end of the tunnel although not everyone will like what’s coming.
The Wall Street Journal: Volcker Rule to Curb Bank Trading Proves Hard to Write
ETFs Could Be a Volcker Victim
Exchange traded funds (ETFs) are investment funds. They are traded on stock exchanges like normal stocks but they are funds holding stocks, commodities or bonds and generally tracking an index like a bond or stock index. (SPDR, an investment fund tracking the S&P500, is one of the largest ETFs.) However, brokers and market-makers for ETFs worry that, if they cannot keep inventory of underlying assets or hedge their positions, they might not be able to easily trade in the funds. Their concern centers on the new constraints proposed by the Volcker rule limiting their ability to hold investments for their own account. Brokers argue that without inventory in the assets and the funds they might not be able to make an efficient market in the funds. If big banks and brokers that are registered as banks are forced out of the business will ETFs survive or be crushed by the aforementioned 900-page Volcker Rule?
And on That Farm he had Some… Fraud
Insurance fraud is nothing new. Lying about injuries or losses has unfortunately been a common theme in the insurance business since its inception. Such fraud usually involves one or two malefactors exploiting some weakness in the system. So earlier this year when 41 tobacco farmers, insurance agents and claims adjusters were all caught taking part in a scheme to defraud the government-subsidized U.S. crop insurance program, it revealed some major weaknesses in the system overall. One insurance broker essentially promised farmers they would never have to pay premiums because the “claims” would be netted out. Of course some of those claims were the result of blatant fraud, including one farmer telling his employees to throw ice at the crops and then claiming hail damage. The lesson is that large programs in specialized insurance, like all programs, need to be monitored. Once a group of participants goes bad – claimant, adjustor and broker the losses can mount quickly. Even Old McDonald might be a crook.
The Competitor of my Competitor is my… Wait, He’s Still my Competitor
AIG has decided to stop entering into new reinsurance contracts with Berkshire Hathaway. Exiting contracts will be allowed to expire but the firm has simply decided that it no longer makes economic sense to deal with such a major competitor for their reinsurance needs. I hear that Coke execs have also stopped drinking Pepsi.
Ratcheting Up the Threats – Regulators Get Serious
The six biggest banks have racked up $103 billion in legal costs in the past five years. So it may be disconcerting to these parties when the head of the OCC, Thomas Curry, states that regulators will start “ratcheting up” enforcement penalties if banks continue to make the same mistakes. Curry said that his agency has made significant changes and admitted to failures in monitoring and detecting such problems as the “London Whale” trading losses. But the regulator made clear that continued non-compliance on the part of the banks will be met with “significant penalties.” When the starting point is $103 billion in legal costs for banks – I would say any “ratcheting” would qualify as significant.