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Volcker Rule Melting Fast

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The almost toothless Volcker Rule imposed earlier this month seems poised to be further defanged. Apparently some banks hold a certain type of CDO that is not permitted under the new rule. They do not have to dispose of it anytime soon, mind you, but they can no longer pretend that they intend to hold it to maturity. That means it must be marked to market. Banks therefore must recognize losses and take hits to capital. Thus, Zions Bank recognized a $387 million loss on CDOs it previously marked at cost but now must be marked to market due to the fact that sooner or later (especially later) they may not be able to continue holding such securities in the future. Apparently many banks are in the same position as Zions and they too would rather not acknowledge their market losses.

I would argue the rule is actually beneficial here. Accounting rules should reflect reality not fantasy. The market losses are real and these securities would not be valued so low if they were safe and would pay-off in due cross. Losses also signal to banks that they cannot escape accountability for poor investment decisions by pretending the losses do not exist.

But, the American Bankers Association would have none of it and sued to challenge the rule. Given the natural proclivities of the judicial system in favor of the most wealthy and powerful (who can afford to hire hoards of lawyers) a judicial challenge to the Volcker Rule in not likely to result in an economically sound ruling.

Worse, however, it appears the regulators simply intend to fold. They recently announced that they intend to  review the rule in light of the ABA’s complaint.


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