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Volcker Rule Could Cause Financial Storm, Warn CEI Scholars

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Volcker Rule Could Cause Financial Storm, Warn CEI Scholars

Washington, DC, Dec. 11, 2013 – Amid the snow that seemed to paralyze DC yesterday, bureaucrats issued a final regulation on Dodd-Frank's Volcker Rule that could create a "perfect storm" of destruction for Main Street investors and entrepreneurs, scholars at the Competitive Enterprise Institute warn.

In an Openmarket.org blog post entitled, "The Volcker Winter Storm," John Berlau, CEI's senior fellow for finance and access to capital writes, "For all the supposed 'toughness' of the new rule, there is nothing specific that would prevent something like J.P. Morgan’s much-despised 'London whale' trade. In the meantime, the new rules could sharply reduce the stream of initial public offerings that have been propelling the stock-market upsurge."

Berlau adds that the new rules' restriction on banks trading shares of companies they take public could curb initial public offering, just as they are making a comeback and the stock market is climbing. He points out that both parties championed regulatory relief for IPOs when President Obama signed the Jumpstart Our Business Startups (JOBS) Act last year. 

Some banks may look at the compliance costs, and simply not underwrite smaller IPOs, harming innovation by entrepreneurs and wealth-building by ordinary investors," he writes.

Berlau also notes the irony of the Volcker Rule's explicit, blanket exemption for trading in government or government-backed securities such as municipal bonds, foreign sovereign debt, and the debt instrument of the government-sponsored housing enterprises of Fannie Mae and Freddie Mac. "Lessened innovation in the private sector and more-of-the-same gambling by government" will be the likely result, he concludes.

In another Openmarket.org blog post, CEI Counsel for Special Projects Hans Bader adds: "Rather than curbing profitable trading, it would have made more sense for the federal government to rethink costly regulations that pressure banks to make risky mortgage loans, especially to certain favored borrowers. But that would have required more political courage on the part of federal officials, and maybe even an ability to admit their own culpability in the 2008 financial crisis."