Wendy Long, a lawyer who is trying to oust fellow lawyer Kirsten Gillibrand from the Senate, has a piece in the WSJ today with a compelling headline: “Financial Regulation is Hurting New York.”

True enough. But the 70 percent of the details that Long gets wrong eclipse the 30 percent that she gets right. A more fitting story might be “Pols Who Don’t Understand the Financial Crisis are Hurting New York.”

Long is 100 percent right about the Volcker Rule, named after the tall guy.

Remember that the Dodd-Frank law, which President Obama signed into law 21 months ago tomorrow, contained this provision that forced banks from JPMorgan Chase to Goldman to sell off their “proprietary trading” desks.

The point was that banks with access to FDIC-guaranteed insurance should not be gambling with that money by using it to make “proprietary” bets on whether certain securities will go up or down.

The rule was wrongheaded on two counts. First, as Long notes, proprietary trading didn’t cause the financial crisis. Almost everything but prop trading caused the crisis.

Second, although nobody ever mentions this, the Volcker rule shows a misunderstanding about the purpose of FDIC insurance.

FDIC insurance is not to protect banks; it’s to protect small customers of banks. When the government uses the FDIC right, it’s the opposite of a guarantee for banks. It lets banks fail by protecting only their small depositors, as opposed to big bondholders.

And now, there’s a third reason why Volcker is all wrong: it’s proving impossible to implement. Regulators have spent nearly two years not figuring out not much of anything when it comes to what is proprietary trading and what isn’t.

To understand the stickiness of the question, remember that Wednesday, the New York Fed announced that it may sell off some of the toxic securities it purchased from AIG in 2008 by way of bailing the insurer out.

Who will buy the securities? Probably Goldman Sachs or one of the others. Why? Presumably to untangle them and sell them to clients. Is this proprietary trading? I don’t know, but if it is, the Fed is helping the banks to break the rule’s spirit (the actual rule doesn’t take effect until summer).

So when Long notes that the “uncertainty is pernicious,” she’s right. Good.

On derivatives, though, Long gets it almost completely wrong.

She attacks Dodd-Frank for requiring banks to put more capital (less borrowed money) behind their derivatives and to trade and clear their most derivatives instruments on central clearinghouses.

Long is upset because, she says, “banks have been buying and selling derivatives for years with no impact on soundness.”

Huh? One of the chief reasons behind the bailouts that began in 2008 was unregulated derivatives.

AIG was able to secure its massive bailout because it had guaranteed tens of billions of dollars’ worth of mortgage-related securities without having put money down to back those bets if they went sour.

Moreover, because AIG had not had to execute such derivatives on a central clearinghouse, no one knew who else — meaning banks such as Goldman — might go under if AIG went under. Lehman’s demise caused global panic for much the same reason.

Derivatives regulation was about the only thing that Dodd-Frank — sort of — got right, and former Goldman guy Gary Gensler is doing a bang-up job of trying to put the relevant rules in place.

Where Dodd-Frank and Gensler still err, it’s being too lenient in derivatives markets (for example, allowing for some exemptions of “non-financial” companies) rather than too tough.

Follow @nicolegelinas on Twitter (please).

Tags:

You may also like

NY leans on a volatile Wall Street

The stock market turmoil of the last week is a reminder of why it's risky, verging on foolhardy, for New York's state government to depend as heavily as it does on high-income households and Wall Street investors. In the current fiscal year, taxes paid by the highest-earning 1 percent of New York taxpayers—including commuters to jobs in the state—are expected to generate 43 percent of personal income tax receipts, which in turn translates into 27 percent of total state taxes. Read More

Our goose is cooked

Wall Street, the goose that laid golden eggs for New York’s public sector for more than 25 years before the Great Recession, is “still working through the fallout from the financial crisis,” as Comptroller Thomas DiNapoli reported earlier this week... Read More

Profits down but bonuses up on Wall Street

Is Wall Street roaring back — as a revenue-generating force for New York’s insatiable state and city governments, that is? You might get that impression from glancing at today’s press release from state Comptroller Thomas DiNapoli... Read More

Dow down = state revenues up?

The prices of some previously high-flying stocks such as Apple recently have been plummeting, and the stock market has just suffered “its worst week of declines in five months,” the Wall Street Journal reports. This is not good news for savers and investors — but it may be causing sighs of relief in some corners of the state Capitol. Read More

Counting the goose’s golden eggs

The Wall Street bonus pool for 2012 expanded by 8 percent, but remains well below the peak levels of a few years ago, according to a release today by state Comptroller Thomas DiNapoli. Read More

Profits down but bonuses up on Wall Street

Is Wall Street roaring back — as a revenue-generating force for New York’s insatiable state and city governments, that is? You might get that impression from glancing at today’s press release from state Comptroller Thomas DiNapoli, which headlines the finding that the average bonus for securities industry employees in New York “grew by 15 percent to $164,530 in 2013, which is the largest average bonus since the 2008 financial crisis, and the third highest on record.” Read More

No Wall Street bailout (of New York) this year

The latest mergers & acquisitions figures are out, and they're not pretty. According to mergermarket, an M&A data watcher, the year's global slowdown is not only continuing but accelerating. New York can hang on to a thread of good news only in that its rate of decline is not accelerating. Read More

The Fed’s escape from NY (someday)

The national housing crisis is over.*** New York should worry. Read More

Subscribe

Sign up to receive updates about Empire Center research, news and events in your email.

CONTACT INFORMATION

Empire Center for Public Policy
30 South Pearl St.
Suite 1210
Albany, NY 12207

Phone: 518-434-3100
Fax: 518-434-3130
E-Mail: info@empirecenter.org

About

The Empire Center is an independent, non-partisan, non-profit think tank located in Albany, New York. Our mission is to make New York a better place to live and work by promoting public policy reforms grounded in free-market principles, personal responsibility, and the ideals of effective and accountable government.