Wall Street thought it would never happen, but the Volcker Rule is now officially approved. The Volcker Rule largely prohibits banks from engaging in speculative securities trading. There are quite a few exceptions, but they are outlined narrowly enough that a bank cannot just trade first and look for an excuse later. Even this goes beyond what was expected on Wall Street, but it is the other provisions of the final rule that come as the biggest shock. Banks are prohibited from bonus arrangements that would give traders an incentive to give away the store. Trading is limited to 3 percent of a bank’s total value or its core capital — that provision alone will decimate Wall Street banks’ trading, which can no longer be large enough to make up for a bank’s losses in lending, branch operations, or real estate speculation, as it did for so many banks going back to 2005. This limit and others provision were tightened after the London Whale scandal, when it emerged that a bank had put more than its entire value at risk in a single speculative trade. And there is more. High-velocity trading appears to be banned completely for banks. Portfolio hedging is effectively prohibited, though it appears banks are still permitted limited short-term hedging related to the activities of a specific client.
There will surely be legal challenges to the Volcker Rule, but Wall Street banks aren’t betting on a sympathetic ear in the courts. Bank of America, for example, has already shut down its trading desks and says it substantially conforms already, though the new rule doesn’t fully take effect until 2015. The bank admits it is giving up $2 billion in annual revenue that it previously made from speculative trading. Goldman Sachs is the one Wall Street company that is seen as unprepared for the new rules, but its stock was down just 2 percent after the rules passed.
Ireland has climbed out from under its European bailout with a final payment made today. The country still faced excessive debt, but this will be financed on the private markets over the next three years while the country pays it down to manageable levels. Ireland’s government finances and economy are much stronger than they were on the crisis weekend when Ireland’s initial bailout was arranged. To this point, Ireland is the only country ever to exit a European bailout.
The central bank of Russia canceled the licenses of three banks, including the country’s 79th largest and two others of similar size. The moves are described as part of a crackdown on money laundering, but the three banks also had urgent problems with capital, liquidity, management, and operations that would be reason enough to shut them down. The banks had combined assets of just over $2 billion. Russia has shut down 3 percent of the country’s banks this year, but this has done little to stem the country’s capital outflow. This illegal money movement is driven by criminal enterprises seeking to place their illegal profits beyond the reach of law enforcement. It is a pattern that will continue as long the central government tolerates an economy largely run by criminal gangs, but many of them are the government’s political supporters.
The U.S. Treasury has sold off its General Motors portfolio, recording a $10 billion loss on the bailout. As often happens, the accounting measures underestimate the costs of action, but also neglect the comparative costs of inaction, which also would have been higher than $10 billion.
A federal court has allowed a Wells Fargo executive to be added to a mortgage fraud case against the bank. The bank certified thousands of defective loans, and the government claims the bank and its executive were both actively involved in covering up deficiencies in order to siphon off money from government programs.
A federal court approved a settlement between merchants and credit card processors intended to give merchants more control over transaction costs. The court approved the settlement even though thousands of merchants opted out.
The O.C.C. closed Texas Community Bank, N.A., with two branches in The Woodlands, Texas. It had $143 million in assets. Spirit of Texas Bank is taking over the deposits and purchasing most of the assets.
The NCUA placed one tiny credit union into conservatorship. Bagumbayan Credit Union has 44 members in Illinois and less than $1 million in assets. It has been operating since 1964. For now, the credit union will be operated by Great Lakes Credit Union.