Shaping the Volcker Rule
A conversation with Professor Kimberly Krawiec
"It’s as the crisis is fading from memory and the legislative process is behind us that all the work is being done. And as the rest of us stop paying attention, that’s when the real industry investment comes in."
— Professor Kimberly Krawiec
Professor Kimberly Krawiec’s latest work delves into input received by regulators charged by Congress with crafting guidelines for implementation of the “Volcker rule” in the Dodd-Frank Wall Street Reform and Consumer Protection Act. One of Dodd-Frank’s most controversial provisions, the rule named for former Federal Reserve Chairman Paul Volcker is intended to prohibit financial institutions from making certain speculative investments that do not benefit their customers and depositors. These are generally known as “proprietary trades,” although the exact nature of the prohibited trades is not defined in the statute.
Krawiec, the Kathrine Robinson Everett Professor of Law whose research agenda includes corporate compliance systems, insider trading, derivatives hedging practices, and “rogue” trading, was certain that banks and traders would be concerned with how the Volcker rule would be interpreted. She decided to find out what the “open issues” were by examining public comment letters submitted to the Financial Services Oversight Council. Expecting to find just 20 or 30 “because it’s an important rule,” she read approximately 8,000. She also reviewed the meeting logs of the Treasury Department, Federal Reserve, Commodities Futures Trading Commission, Securities and Exchange Commission, and Federal Deposit Insurance Corporation.
Krawiec talked to Duke Law Magazine about her research and her forthcoming paper, “Don’t ‘Screw Joe the Plummer:’ The Sausage-Making of Financial Reform,” the title of which is derived from one of the comment letters she read.
Duke Law Magazine: Who submitted comments? Press reports on your work have indicated a huge disparity in the numbers of comments from financial industry insiders as opposed to members of the public.
Professor Krawiec: That’s not the full picture. Anybody who wanted a meeting with regulators could get one. Public interest groups simply didn’t have the same resources to dedicate to this issue as financial groups.
Private citizens, often at the behest of public interest groups, submitted thousands of letters, but their comments almost never addressed the specifics of the regulatory issues. Unsurprisingly, financial industry representatives had very detailed, very specific comments. That doesn’t mean that the public is dumb, or that financial institutions are evil. But it does speak to how the process works, and maybe says something about whether it works for the public.
DLM: Is it possible to get informed commentary from the public on an issue like this?
Krawiec: It will be an uphill battle. This, to me, is what makes financial reform potentially different from some other areas of the law. When you look at something like the consumer protection provisions of Dodd-Frank, consumers know what credit cards and ATM cards are, and they understand basically how that affects their lives. That’s just not true with proprietary trading. You get a sense from most of the letters that people don’t really know what it is, much less why they should be concerned by it. They understand even less why we have to balance any danger from proprietary trading against the positive things that banks do, like market making and underwriting.
It quite clearly became a place for people to vent their frustration in a general way. Out of all the provisions, this seemed to be the one that the public interest groups used to get the public engaged. You can’t go to the public and say “So, there’s this rule that tries to distinguish proprietary trading from market making and we want you to write a letter about that.” Instead, you have to say something like, “We had to bail out the banks because of their greed and risk taking, and now there’s a rule that would stop that, but the banks are trying to gut it. We need your help.” People were already looking for a place to put their outrage, and they really were able to tap into that for this particular rule in a way that sort of gave people an outlet, which I think is useful. I think it is a useful reminder to the government that people are really upset about the financial crisis and that we haven’t, in the eyes of many people, really dealt with the shakeout from that. That, to me, is a good thing, but at the same time, that’s one of the reasons the public comment letters look so goofy. It’s not entirely their fault they’re focused on the wrong point.
DLM: Much of the public conversation on financial reform has been focused on ideology. What’s the value in focusing on process instead?
Krawiec: I think process is incredibly important, and Dodd-Frank was, I think, notable in that it left all the meat to regulators. So much depends on implementation.
On the one hand, that’s good and understandable. They have the time and expertise to devote to this when Congress just clearly doesn’t. But at the same time, it’s not as visible. What was astonishing to me while watching Dodd-Frank go through the process in the legislature was that lots of people were really paying a lot of attention. There was a fair amount of outrage in the papers, and on blogs and social media, whenever it was reported that something people thought should “stick it” to the banks wasn’t happening. But it’s as the crisis is fading from memory and the legislative process is behind us that all the work is being done. And as the rest of us stop paying attention, that’s when the real industry investment comes in. They invested a lot in lobbying Congress and they’re investing a lot right now. They can’t take their eyes off this. It’s too important for their bottom line, and it’s not that way for most people, which makes it hard to have any sort of meaningful counterbalance.