June 13, 2013
Introduction—The Yale Club
Thanks for the introduction and invitation to spend some time with you this afternoon. Sally Miller and her staff do an excellent job working with our Agency. It's also good to be with you at the Yale Club—"...an intimate oasis in the heart of Manhattan...since 1897." I know the Yale Club only from Fitzgerald's Nick Carraway of Gatsby fame who "...took dinner usually at the Yale Club." In fact in the new Gatsby movie Nick (Tobey Maguire) and Jay himself (Leonardo DiCaprio) mention the Yale Club. If you haven't seen it, The Great Gatsby (2013), my take is that it’s full-on super cinema. Go right after we're done here. In fact, if you do, it will be a great finale to our little mini movie montage here at the Yale Club.
You see, we are gonna throw down a few sporadic cinema seconds in our tiny talk today. Here’s a request: Won’t’cha take a deep breath, set aside your iPhones and inhibitions about enduring yet another bureaucrat at lunch? If you don't pay attention, it’s a ride you won’t survive. I promise there’s significant substance and organization to this aberration. Let's get our flick freak on!
Belly of the Beast
First, I extend a heartfelt greeting from the belly of the beast—the nation's capital. (By the way, Belly of the Beast—2003—direct-to-video (DVD) Steven Segal film. The action sequences are impressive, but the script is pretty hurting. Nuf said). However, government does seem like a beast at times, right? I came up from D.C. the other day and I can tell you that the town that continues to take a licking keeps on ticking. That's not welcome news to some of you. In fact, at times, I'm with ya.
All too often, laws, rules and regulations go overboard. Why do we need so much government? Why are there so many regulations? Sometimes rules and regs just seem like a big fat hairy waste of time, money and paper. We could do with fewer laws, less rules, less regulation. Less could be more, right? Right! Damn straight!
Bon Appetit, Ya'll
Come to think of it, beef, it’s not only what’s for dinner, but it’s what’s for lunch today at the Yale Club. Well, as someone who worked at the U.S. Department of Agriculture and has visited a few beef “processing” facilities in my day, I know one thing for positutley sure...you should all be pleased we have food safety regulations. Without them...talk about having a belly of the beast, whoa! Yakkity yak, yak, yak, you don't want that. Trust me, there’s a lot of truth to the 2008 documentary, Food Inc. Just sayin’. I'm from the government, and I’m here to help. Bon appetit, ya'll.
But, that's it, right? No need for other rules or regs! Wait, umm, well, actually, some of you folks came by planes, trains and automobiles. Now that's a funny movie (1987's Planes, Trains and Automobiles) with Steve Martin and John Candy, as Neal and Del. One of my favorite scenes is when Del falls asleep at the wheel and they slide between two semis—almost. The car’s demolished but Del says not to worry, “That’ll buff right out.”
But you guys travel and want it to be safe, and all the food and drink was delivered by trucks or maybe a plane or a train. So, I suppose transportation needs some safety regulations. But, that's it, right?
And, well, hold on. I guess we want those FDA drug regulations (haven’t seen The East—2013—on the pharma industry which came out two weeks ago). And of course we want some energy and nuclear plant safety rules, (a la Meryl Streep, Cher and Kurt Russell in 1983's Silkwood. They were all nominated for awards). And, we want water and air quality regs (I haven't seen Matt Damon's Promised Land —2012— on fracking, although I think he's super talented, as is John Krasinski). But air and water regs, those are okay. But, that's it, right?
And, consumer product safety rules are a pretty good thing. We don't want toys with lead paint, dog food with poisons. We don't want an autobahn on I-95 that runs up here from Washington, (although in some of our big, smaller populated western states, I'm all ears to the concept of "suggested speeds").
Well, you folks are sharp. Remember Robert De Niro talking with Billy Crystal in Analyze This (1999). “You…you, you got a gift…oh yeah. You saw that there was something I was trying to do and you…you figured that out. You’re very good, you. The point is that some regulations are, yeah they are, needed in society.
In fact, most people outside of this room—and I know some here, too—actually want robust rules and regulations governing the financial sector. In fact, a lot of people feel pretty strongly about the matter. Remember It's a Wonderful Life (1946) with Jimmy Stewart? It's one of the favorite films in American cinema. There’s that scene after Uncle Billy has lost the $8,000 he was supposed to deposit in Mr. Potter’s bank. The Building and Loan looks like it's going into bankruptcy and the customers are on a tear—like a "find an ATM in Cyprus" tear. They were furious and wanted their money. Well, it's that type of fervor—a Network (1976) “I’m mad as hell, and I’m not going take this anymore!” type of passion that is demanding financial regulatory reform. They want reform because they lost their pensions and their savings in the market meltdown. I speak with and email people every single day on this subject. I'm going to leave it at that, except to say that to deny that folks are fed up and want reform is to be untethered to reality. “That’s the fact, Jack.” Remember Bill Murray with his rag tag platoon in Stripes (1981)? “That’s the fact, Jack.” By the way, anyone recall the actual name of the television network in Network? UBS—the UBS Evening News with Howard Beale.
That said, like most things in life and in the belly of the beast, we shouldn’t over-react. Let’s ensure there’s an appropriate balance. It's all about balance.
Sure there is a need for financial regulatory reform in the U.S. and around the globe. However, let's not forget the good that the banking industry and the financial sector have done for the world. Let's try to look at both sides in a balanced fashion, shall we?
Importance of Banks
Without banks and bankers we wouldn’t have much of what we have today. We probably wouldn’t have the Yale Club. Heck, Yankee Stadium was funded by Goldman Sachs. Barclay’s built one of the first train lines in the world, the Stockton and Darlington Railway (1825). The Commonwealth Bank of Australia helped build the merchant marine shipping fleet during World War I. The Grameen Bank makes micro loans to poor, rural people—almost all of whom are women.
The banking sector injects billions of bones each year into the economies of cities across the globe. We wouldn't have the buildings, the transportation networks, the homes and businesses without banks. (Gosh, what would we regulate? See, it’s your fault). In fact, without banks and bankers we’d be in a pretty pitiful place. I often say to my friends and neighbors, if you see a banker, take a moment, look them in the eye and say a simple thank you for their service to the world. Wait, wait, maybe that’s from my screenplay—A Regulator’s View. There’s no release date. It hasn’t been green-lighted…yet. In all seriousness, the banking industry and the financial sector have been a key to our history and they are a key to our future. Mr. Potter for President! Well, maybe that's going too far. After all, he stole that eight grand from Uncle Billy!
Again: balance. Banks aren’t inherently bad. They’ve done a helluva lotta good around the world. Most of them do absolutely great things. With that as our backdrop, let's talk about two key and time sensitive issues that impact you, international bankers and banks, and that need an infusion of balance: the Volcker Rule and cross-border or ET issues (Extraterritorial, not Steven Spielberg’s 1982 E.T. The Extra-Terrestrial—“E.T. phone home”).
First Volcker: It’s a huge issue that, frankly, might be on life-support. Now, before you folks get all “yeah, yeah, yeah” and start knuckle bumping, I’ll give you fair warning. If Volcker isn’t finished in a robust fashion, that’s gonna be big trouble for banks. (Big Trouble—2002, Tim Allen and Rene Russo—great actors, but not worth a Netflix shot). Here’s why a weak Volcker Rule would be big trouble. As we noted, people are mad as hell. Many folks in fairly high levels of government—presidents of Federal Reserve Banks, Members of the House and Senate and others—want to break up the banks. Legislation has been introduced to do just that. Some want to go back to Glass-Steagall.
Now, Dodd-Frank says that banks should not be allowed to engage in proprietary trading, provided however, that they may hedge their financial business risks, e.g. risks they take on in the course of commercial banking. I think that’s a good thing. However, I have a critical caveat. What could very easily happen is that the definition of “hedging” in the final Volcker Rule could be so broad as to allow unchecked speculation costumed as hedging. We have already seen the difficult duplexity that was created with the repeal of Glass-Steagall when a couple of banks had the incentive and bet against their own customers and settled for hundreds of millions of dollars with the SEC. Remember in Wall Street (1987) just before Bud—Charlie Sheen—is arrested? Lou Mannheim—Hal Holbrook—says, “The problem with money, Bud, is that it makes you do things you don't want to do.” If banks continue to speculate for themselves, and watch out if they bet against their customers ever again, I think that may mark the beginning of the end for big banks. The populace and those in government will come back like a Rambo movie (1982, 1985, 1988, and 2008). And frankly, I’d be in the camp saying “You go, Rambo.”
So, as hard as it is to believe, I think bankers should support a fairly tightly written Volcker Rule—out of self-preservation if nothing else—with regard to hedging financial risk. I’ve written to Chairman Bernanke and my fellow regulators in the past on this matter, but think we have an obligation at the CFTC to give specific language in this regard. I hope we will do that very soon.
As strange as it may seem, the Volcker Rule might actually be bankers’ best buddy. And, by the way, when I say best buddy, I mean that comradery and fellowship you sense when dudes are in a best buddy film like Butch Cassidy and the Sundance Kid—1969 or The Hangover(s)—2009, 2011 and 2013. Ya know, palling around—like Governor Palin says—on an adventure, occasionally having a wreck or blowing stuff up type of thing, but ending up even closer than ever. Or, I guess in the case of Butch and Sundance, you get killed in a hailstorm of bullets. I know many of you don’t buy what I’m selling. But, it’s truly, honestly, what I believe. It isn’t some George Lucas Star Wars—(1977, 1980, 1983, 1999, 2002, 2005 and 2008)—Jedi mind trick.
The balance I’m suggesting is that rather than undercut the important role that banks have played—even large banks in our society—by breaking them up, get them back to doing what they have been so damn good at doing over the years. Let them focus on helping to fuel-inject businesses, create jobs and build infrastructure. Let’s let them get back to their sweet spot. That means a strong Volcker Rule that stops unbridled speculation for the banks’ bottom line.
Cinema of Uncertainty
Well now, some of you are skeptical. Hang with me for this last issue. It’s important, so frankly my dears, I hope you do “…give a damn.” (Gone With the Wind—1939). Let’s talk cross-border (ET) issues.
On July 13th, absent some relief from my Agency, cross-border compliance will be mandated on final Dodd-Frank rules. Anyone know Dan LaFontaine? He’s the movie ad voice-over king who begins many such ads with “In a world where…” In a world where regulatory reform seems the norm (boom sounds a drum), where there’s ambiguity in perpetuity (boom sounds a drum), one action (boom), on one date (boom), may change history (boom)…forever. Cinema of Uncertainty (boom). Coming July 13th. This fictitious film has not been rated (boom, boom). Go to black.
Ya know what? It may seem like a cinema of uncertainty (boom) for many. Today, I’d like to try and facilitate moving forward to address the set of circumstances in which we find ourselves.
Let’s start with this: Dodd-Frank section 722(d)—which amends Commodity Exchange Act (CEA) section 2(i)—requires that swaps reforms shall apply outside the U.S. if those activities have “…a direct and significant connection with activates in, or effect on, commerce…” of the United States. Here is why that is important: the five largest U.S. commercial bank derivatives dealers account for 93 percent of the $223 trillion of notional value of the U.S. bank derivatives markets. Those five have over 3,300 foreign subsidiaries. The risk that builds up in one or a handful of these foreign subsidiaries (or any foreign entity otherwise deeply interconnected with U.S. firms) can, and in recent history has, led to risks to the U.S. and international economy. This isn’t just a U.S. dilemma. When Commissioner Sommers and I testified on the House side last December, Patrick Pearson, the Head of Financial Markets Infrastructure at the European Union (E.U.), noted that U.S. firms, like Lehman Brothers when it failed, brought risk from trading in the States to the E.U. So, this isn’t a one-way street by any means. I’m not going to give more examples; you know them as well as I do. But, systemic risk doesn’t follow national boundaries. That’s why the G20 has, repeatedly, sought swaps reforms, even envisioning an end-2012 implementation of derivatives market reform commitments.
In that regard, while we have our Dodd-Frank law, others (particularly the European Union) have their own ideas. Many, in fact, are similar to our ideas. That’s great because the best way to make financial regulations work efficiently and effectively is to harmonize them—globally. Harmonized rules would allow global firms to compete based on pricing and quality, not upon on advantages related to regulatory arbitrage.
I think once in a while, some want there to be some sort of Clash of the Titans (two versions, 1981 and 2010). Well, we aren’t getting all Liam Neeson on the rest of the world. We aren’t about to release the Kraken. We don’t even have a Kraken, and we don’t have the ambition—let alone the resources—to do any more than what Dodd-Frank requires: preventing direct and significant risk to U.S. commerce.
How do we get there, given this cinema of uncertainty? Lemme try this on you for size. Last week, my colleague Commissioner O’Malia (whom I respect immensely), suggested we provide exceptive relief until the end of the year. That would take some of the pressure off of folks who may need to comply on July 13th. I appreciate, and understand this approach, although it doesn’t do what Dodd-Frank requires us to do by this time two years ago.
Here’s my take on two things that we should do:
Prior to July 13, 2013, the Commission should approve our guidance. We need to make sure the right institutions are subject to appropriate regulation and oversight with recent history as a guide. The definition of “U.S. person” should be broad enough to capture funds that market to U.S. investors. The Commission should also ensure that foreign firms with a direct and significant connection to U.S. commerce, including guaranteed affiliates of registered swaps dealers, do not escape regulation.
In addition, we should allow for substituted compliance only when foreign rules are truly comparable in terms of substance, enforcement, and outcomes as U.S. rules, particularly when it comes to five categories of rules, i.e., clearing, capital, margin, trade price transparency (particularly post-trade), and customer protection.
At the same time, we should simultaneously implement targeted, staggered cross-border compliance. I’m suggesting that we provide this phased-in compliance with the final rules for those entities that fall within (given our guidance) the definition of U.S. person or foreign firms that have a direct and significant connection to U.S. commerce. For example, foreign affiliates of U.S. swaps dealers that are guaranteed by a U.S. parent (like AIG Financial Products in London). AIG’s London credit default swaps helped nearly take down the U.S. economy in 2008 and we need to make sure that type of reckless swap trading doesn’t do the same again.
Such compliance requirements should be part and parcel of the guidance—they go together—and should be done at the same time. We should provide this targeted, staggered compliance as an appropriately nuanced, time-limited solution that is cognizant of global regulatory efforts, particularly that of the E.U.
This can be done. It needs to be done. These aren’t new issues to us. By putting the guidance and targeted, staggered compliance together and not creating an additional action, we can fulfill our mandate from Congress and President Obama under the financial reform law, provide needed certainty to markets, and foster increased international cooperation and comity. I believe this will have the added benefit of promoting a more globally harmonized rule set. Here’s why: Remember the movie with Kevin Costner, Field of Dreams (1989)? The voice from the Iowa corn field whispers, “If you build it, he will come.” Well, instead of baseball players, my view is if we and a few others like the E.U. build it—financial regulations—they—the entire financial regulatory community—will come and be part of new and improved, coordinated implementation of more closely aligned and harmonized regulations. This is a more balanced approach to cross-border issues.
So, that’s a wrap, a couple of outta the box ideas on the Volcker Rule and cross-border. I’m gonna finish up because I want to allow you guys time to make it to Gatsby. There’s a 1:50 and a 4:10 at the AMC Empire 25 on West 42nd.
Remember Argo (2012)? Ben Affleck says of the ploy to pose as movie makers when trying to get hostages out of Iran, “It’s the best bad idea we have sir, by far.” I hope it wasn't too bad an idea to do a little cinefile-laced policy trip with you guys. By the way, if you didn’t have much of a clue on the movie references, your boss thanks you. You work too hard. You gotta do more old school bankers’ hours. Do more “me time” or family time—seriously.
Well, this little movie talk didn't feel like a bogus journey...Bill and Ted. Sorry, I can't stop now (Bill and Ted movies Excellent Adventure—1989—and Bogus Journey—1991). I probably need a governor, ya’ know, to slow me down. Actually, maybe a governator will work. As he said in Terminator (1984), “Hasta la vista, baby."
Thanks. Enjoy the show.
Last Updated: June 13, 2013