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Today in Our Completely Captured Financial Regulatory Apparatus

Adding to the spate of delays on finalizing rules from the Dodd-Frank financial reform law, the final Volcker rule will probably not get finished until 2013. This is at least six months past due, as the original law called for a final Volcker rule in July. Five separate government agencies – the FDIC, the Federal Reserve, the SEC, the CFTC and the OCC – have to sign off on the new rule, which seeks to limit the ability for commercial banks with depository insurance to engage in high-risk proprietary trading.

The rule, authored by Jeff Merkley and Carl Levin, has been the source of a lot of back and forth between the Democratic Senators, who continue to press their legislative intent in drafting the rule, and agency heads, including the Treasury Department (which has no formal role but has played their part behind the scenes), who want to neuter the rule and tailor it so it won’t disrupt current bank trading activities. At the heart of the dispute is whether to allow a loophole for banks to trade on their own accounts when hedging against losses elsewhere in their business. This type of hedge was allegedly the function of the Fail Whale trades at JPMorgan Chase, which ended up losing the company almost $8 billion. Merkley and Levin have said that allowing “portfolio hedges,” large bets that seek to counter entire trading portfolios rather than individual trades, completely undermines the Volcker rule’s intent.

This delay gives more time for House Republicans to lobby to weaken the rule. The House Financial Services Committee plans just such an effort with a hearing in two weeks on “unintended victims” of the Volcker rule.

Regulators have received over 18,000 comments on the Volcker rule, and thankfully, some of them have come from legitimate reform activists, like the knowledgeable group at Occupy the SEC. But too often, those comments come from the financial lobbyists seeking to gut financial reform in implementation, and succeeding at it. Here’s another example of that with the new Office of Financial Research, enacted during Dodd-Frank.

The office is looking as if it will be a tool of the financial services industry, instead of a check on it. Its main role is to serve the Financial Stability Oversight Council, providing the systemic risk overseer with data and analysis of where the nukes are buried.

But the Office of Financial Research was hobbled from the get-go by a poor design. It is housed in the Treasury Department, while ostensibly being independent of it. It has a small budget. And it has to report to the very regulators it is supposed to report on.

This month, it announced its advisory committee. Thirty big names charged with giving the fledgling operation direction and gravitas. But these same people have also compromised it.

By my count, 19 of the 30 committee members work directly in financial services or for private sector entities that are dependent on the industry. There are academics, but many of them have lucrative ties to the financial services industry. I noted only one financial industry critic: Damon A. Silvers, the policy director for the A.F.L.-C.I.O.

Damon Silvers is great, but it looks like he’ll have a huge uphill battle on that advisory committee. And housing the OFR in Treasury just means it will be subsumed by the Treasury agenda, which has been for the last term protecting banks at all costs.

One financial regulator has done their job lately: Daniel Tarullo, a Fed governor, who spearheaded efforts to force tougher bank capital rules on foreign banks operating inside the United States. But this comes in the context of the Fed delaying new international Basel III rules for bank capital. So even that step forward comes with two steps backward.

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David Dayen

David Dayen