The recent GAO Report on banking entity activities prohibited by the Volcker Rule:
As required by section 989 of the Dodd-Frank Act, GAO . . . reviewed the trading and fund activities of the largest U.S. bank holding companies and collected selected data on their profits, losses, and risk measures.
determined . . . that collecting data on other proprietary trading [i.e. outside of stand-alone prop desks] was not feasible because the firms did not separately maintain records on such activities and because of the uncertainty over the types of activities that will be considered proprietary trading until the completion of the required rulemaking. We also collected data on hedge and private equity fund investments that the bank holding companies believed to be restricted by the act. . . . Revenues and losses from these firms’ hedge fund and private equity fund investments followed a similar trend [of small revenues relative to other activities.]
Translation: Congress told us to study prop trading in order to assist with Volcker Rule implementation and rule making, but we can’t do that until after Volcker Rule implementation and rulemaking because until then we won’t know what prop trading is. Also, since Congress did not fully define which activities were prohibited under the hedge and private equity fund restrictions, we asked banks which of their fund activities they believed were restricted by the statute. They said, “not much.”
To be fair, the Merkley and Levin (among other) rants against GAO are only slightly less absurd:
The GAO study is a major disappointment. At best it is incomplete. At worst it is misleading. . . .
Congress provided a definition of proprietary trading to work with; direction to look at proprietary trading wherever it exists; and direction to look at how proprietary trading losses can contribute to instability of financial institutions.
Rather than follow the statutory directions, GAO has examined in detail only proprietary trading which occurs on distinct ‘stand-alone’ proprietary trading desks and gave only passing consideration to the risks and conflicts of interest associated with proprietary trading more broadly. Just a fraction of all proprietary trading occurs on stand-alone desks . . .
But Congress did not, in fact, provide a definition of proprietary trading, which is rather the point. Admittedly, the section 989 definition of proprietary trading (the section that directs the GAO study) is broader than the 619 definition, as Merkely and Levin point out. However, it seems to me that even that definition contains substantial ambiguities and, in any event, doesn’t resolve the lack of data problem.
More fundamentally, GAO’s inability to obtain detailed information on prop trading activity outside of designated prop desks -- the same data that regulators will clearly need for effective rule enforcement – would seem to be a sign of the many problems inherent in the Volcker rule, rather than problems with GAO.