EXAMINING THE IMPACT OF THE VOLCKER RULE ON MARKETS, BUSINESSES, INVESTORS, AND JOB CREATION

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by  Committee on Financial Services

EXAMINING THE IMPACT OF THE
VOLCKER RULE ON MARKETS, BUSINESSES,
INVESTORS, AND JOB CREATION
JOINT HEARING
BEFORETHE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
ANDTHE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OFTHE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
JANUARY 18, 2012
Printed for the use of the Committee on Financial Services
Serial No. 112–95
(
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EXAMINING THE IMPACT OF THE
VOLCKER RULE ON MARKETS, BUSINESSES,
INVESTORS, AND JOB CREATION
JOINT HEARING
BEFORETHE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
ANDTHE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OFTHE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
JANUARY 18, 2012
Printed for the use of the Committee on Financial Services
Serial No. 112–95
(
U.S. GOVERNMENT PRINTING OFFICE
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice Chairman BARNEY FRANK, Massachusetts, Ranking
PETER T. KING, New York Member
EDWARD R. ROYCE, California MAXINE WATERS, California
FRANK D. LUCAS, Oklahoma CAROLYN B. MALONEY, New York
RON PAUL, Texas LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois NYDIA M. VELA´ZQUEZ, New York
WALTER B. JONES, North Carolina MELVIN L. WATT, North Carolina
JUDY BIGGERT, Illinois GARY L. ACKERMAN, New York
GARY G. MILLER, California BRAD SHERMAN, California
SHELLEY MOORE CAPITO, West Virginia GREGORY W. MEEKS, New York
SCOTT GARRETT, New Jersey MICHAEL E. CAPUANO, Massachusetts
RANDY NEUGEBAUER, Texas RUBE´N HINOJOSA, Texas
PATRICK T. MCHENRY, North Carolina WM. LACY CLAY, Missouri
JOHN CAMPBELL, California CAROLYN MCCARTHY, New York
MICHELE BACHMANN, Minnesota JOE BACA, California
THADDEUS G. McCOTTER, Michigan STEPHEN F. LYNCH, Massachusetts
KEVIN McCARTHY, California BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico DAVID SCOTT, Georgia
BILL POSEY, Florida AL GREEN, Texas
MICHAEL G. FITZPATRICK, Pennsylvania EMANUEL CLEAVER, Missouri
LYNN A. WESTMORELAND, Georgia GWEN MOORE, Wisconsin
BLAINE LUETKEMEYER, Missouri KEITH ELLISON, Minnesota
BILL HUIZENGA, Michigan ED PERLMUTTER, Colorado
SEAN P. DUFFY, Wisconsin JOE DONNELLY, Indiana
NAN A. S. HAYWORTH, New York ANDRE´ CARSON, Indiana
JAMES B. RENACCI, Ohio JAMES A. HIMES, Connecticut
ROBERT HURT, Virginia GARY C. PETERS, Michigan
ROBERT J. DOLD, Illinois JOHN C. CARNEY, JR., Delaware
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ‘‘QUICO’’ CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
LARRY C. LAVENDER, Chief of Staff
(II)
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SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
SHELLEY MOORE CAPITO, West Virginia, Chairman
JAMES B. RENACCI, Ohio, Vice Chairman CAROLYN B. MALONEY, New York,
EDWARD R. ROYCE, California Ranking Member
DONALD A. MANZULLO, Illinois LUIS V. GUTIERREZ, Illinois
WALTER B. JONES, North Carolina MELVIN L. WATT, North Carolina
JEB HENSARLING, Texas GARY L. ACKERMAN, New York
PATRICK T. MCHENRY, North Carolina RUBE´N HINOJOSA, Texas
THADDEUS G. McCOTTER, Michigan CAROLYN MCCARTHY, New York
KEVIN McCARTHY, California JOE BACA, California
STEVAN PEARCE, New Mexico BRAD MILLER, North Carolina
LYNN A. WESTMORELAND, Georgia DAVID SCOTT, Georgia
BLAINE LUETKEMEYER, Missouri NYDIA M. VELA´ZQUEZ, New York
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
SEAN P. DUFFY, Wisconsin STEPHEN F. LYNCH, Massachusetts
FRANCISCO ‘‘QUICO’’ CANSECO, Texas JOHN C. CARNEY, JR., Delaware
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee
(III)
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SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES
SCOTT GARRETT, New Jersey, Chairman
DAVID SCHWEIKERT, Arizona, Vice MAXINE WATERS, California, Ranking
Chairman Member
PETER T. KING, New York GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma RUBE´N HINOJOSA, Texas
DONALD A. MANZULLO, Illinois STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois BRAD MILLER, North Carolina
JEB HENSARLING, Texas CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin
JOHN CAMPBELL, California ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan JOE DONNELLY, Indiana
KEVIN McCARTHY, California ANDRE´ CARSON, Indiana
STEVAN PEARCE, New Mexico JAMES A. HIMES, Connecticut
BILL POSEY, Florida GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK, Pennsylvania AL GREEN, Texas
NAN A. S. HAYWORTH, New York KEITH ELLISON, Minnesota
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois
(IV)
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C O N T E N T S
Page
Hearing held on:
January 18, 2012 .............................................................................................. 1
Appendix:
January 18, 2012 .............................................................................................. 77
WITNESSES
WEDNESDAY, JANUARY 18, 2012
Carfang, Anthony J., Founding Partner, Treasury Strategies, Inc., on behalf
of the U.S. Chamber of Commerce ..................................................................... 49
Elliott, Douglas J., Fellow, The Brookings Institution ......................................... 53
Evans, Scott, Executive Vice President, President of Asset Management,
TIAA–CREF .......................................................................................................... 51
Gensler, Hon. Gary, Chairman, Commodity Futures Trading Commission
(CFTC) ................................................................................................................... 12
Gruenberg, Hon. Martin J., Acting Chairman, Federal Deposit Insurance
Corporation (FDIC) .............................................................................................. 14
Johnson, Simon, Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan
School of Management ......................................................................................... 52
Marx, Alexander, Head of Global Bond Trading, Fidelity Investments .............. 55
Peebles, Douglas J., Chief Investment Officer and Head of Fixed Income,
AllianceBernstein, on behalf of the Securities Industry and Financial Mar-
kets Association’s Asset Management Group .................................................... 58
Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commis-
sion (SEC) ............................................................................................................. 11
Standish, Mark, President and Co-CEO, RBC Capital Markets, on behalf
of the Institute of International Bankers (IIB) .................................................. 60
Tarullo, Hon. Daniel K., Governor, Board of Governors of the Federal Reserve
System ................................................................................................................... 10
Turbeville, Wallace C., on behalf of Americans for Financial Reform ................ 57
Walsh, Hon. John, Acting Comptroller of the Currency, Office of the Comp-
troller of the Currency (OCC) ............................................................................. 15
APPENDIX
Prepared statements:
Garrett, Hon. Scott ........................................................................................... 78
Hinojosa, Hon. Ruben ....................................................................................... 80
Carfang, Anthony J. ......................................................................................... 83
Elliott, Douglas J. ............................................................................................. 94
Evans, Scott ...................................................................................................... 97
Gensler, Hon. Gary ........................................................................................... 139
Gruenberg, Hon. Martin J. .............................................................................. 143
Johnson, Simon ................................................................................................. 161
Marx, Alexander ............................................................................................... 165
Peebles, Douglas J. ........................................................................................... 180
Schapiro, Hon. Mary L. .................................................................................... 187
Standish, Mark ................................................................................................. 198
Tarullo, Hon. Daniel K. .................................................................................... 211
Turbeville, Wallace C. ...................................................................................... 220
Walsh, Hon. John ............................................................................................. 232
(V)
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VI
Page
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Hinojosa, Hon. Ruben:
Letter from the Small Business Investor Alliance ......................................... 242
Perlmutter, Hon. Ed:
Chapter written by Adair Turner ................................................................... 244
Schweikert, Hon. David:
Letter from the American Bankers Association ............................................. 249
Written statement of BlackRock, Inc. ............................................................. 251
Written statement of the Bond Dealers of America ...................................... 258
Letter from the Business Roundtable ............................................................. 262
Letter from CMS Energy ................................................................................. 264
Comment letter of Professor Darrell Duffie ................................................... 267
‘‘Market Making Under the Proposed Volcker Rule,’’ by Professor Darrell
Duffie, Stanford University .......................................................................... 269
Written statement of ICI Global ..................................................................... 300
Written statement of the Investment Company Institute ............................ 307
Written statement of the Securities Industry and Financial Markets As-
sociation ......................................................................................................... 319
Written statement of SVB Financial Group ................................................... 372
Carfang, Anthony J.:
Written responses to questions submitted by Representatives Peters,
Grimm, and McCarthy ................................................................................. 382
Evans, Scott:
Written responses to questions submitted by Representative McCarthy .... 386
Written responses to questions submitted by Representative Peters .......... 387
Gruenberg, Hon. Martin J.:
Written responses to questions submitted by Chairman Bachus ................. 388
Written responses to questions submitted by Representative Biggert ........ 390
Written responses to questions submitted by Representative Peters .......... 391
Written responses to questions submitted by Representative Huizenga ..... 392
Written responses to questions submitted by Representative Grimm ......... 393
Written responses to questions submitted by Representative McCarthy .... 394
Marx, Alexander:
Written responses to questions submitted by Representatives Peters and
McCarthy ....................................................................................................... 395
Peebles, Douglas J.:
Written responses to questions submitted by Representatives Peters and
McCarthy ....................................................................................................... 407
Schapiro, Hon. Mary L.:
Written responses to questions submitted by Chairman Bachus ................. 426
Written responses to questions submitted by Representative Peters .......... 440
Written responses to questions submitted by Representatives Huizenga
and Peters ...................................................................................................... 442
Written responses to questions submitted by Representative Grimm ......... 443
Written responses to questions submitted by Representative Biggert ........ 448
Written responses to questions submitted by Representative McCarthy .... 449
Standish, Mark:
Written responses to questions submitted by Representative McCarthy .... 450
Written responses to questions submitted by Representative Peters .......... 452
Tarullo, Hon. Daniel K.:
Written responses to questions submitted by Chairman Bachus ................. 454
Written responses to questions submitted by Representatives Huizenga
and Peters ...................................................................................................... 461
Written responses to questions submitted by Representative Peters .......... 462
Written responses to questions submitted by Representative McCarthy .... 463
Turbeville, Wallace C.:
Written responses to questions submitted by Representatives Peters, Car-
son, and McCarthy ........................................................................................ 464
Walsh, Hon. John:
Written responses to questions submitted by Chairman Bachus, and Rep-
resentatives Peters, Huizenga, Grimm, and Biggert ................................. 472
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EXAMINING THE IMPACT OF THE
VOLCKER RULE ON MARKETS, BUSINESSES,
INVESTORS, AND JOB CREATION
Wednesday, January 18, 2012
U.S. HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT, AND
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The subcommittees met, pursuant to notice, at 9:33 a.m., in room
2128, Rayburn House Office Building, Hon. Shelley Moore Capito
[chairwoman of the Subcommittee on Financial Institutions and
Consumer Credit] presiding.
Members present from the Subcommittee on Financial Institu-
tions and Consumer Credit: Representatives Capito, Renacci,
Royce, Manzullo, McHenry, Pearce, Westmoreland, Luetkemeyer,
Huizenga, Duffy, Canseco, Fincher; Maloney, Gutierrez, Watt,
Hinojosa, McCarthy of New York, Baca, Lynch, Miller of North
Carolina, Scott, and Carney.
Members present from the Subcommittee on Capital Markets
and Government Sponsored Enterprises: Representatives Garrett,
Schweikert, Royce, Manzullo, Biggert, Neugebauer, Pearce, Posey,
Hayworth, Hurt, Dold, Grimm, Stivers; Maloney, Waters, Sherman,
Hinojosa, Lynch, Miller of North Carolina, Green, Ellison, Perl-
mutter, Donnelly, Carson, Himes, and Peters.
Ex officio present: Representatives Bachus and Frank.
Chairwoman CAPITO. This hearing will come to order.
I would like to welcome everybody back from the Christmas and
New Year’s holiday. We want to start with a good hearing, and I
think that’s what we have in front of us today.
I would like to thank both panels of witnesses for coming this
morning. The participation in this morning’s hearing will help our
members of the Capital Markets and the Financial Institutions
Subcommittees better understand the complexities and the far-
reaching nature of the proposed Volcker Rule.
Members and our witnesses should note that the first panel will
be excused at noon; and, as we do expect Floor votes around 1 p.m.,
we will see what happens from there. Given the size of the second
panel, we will likely recess and then come back at the call of the
Chair.
(1)
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2
Today’s hearing will examine implementation of Section 619 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act,
commonly referred to as the Volcker Rule, after former Federal Re-
serve Chairman Paul Volcker. This rule will prohibit U.S. bank
holding companies and their affiliates from engaging in proprietary
trading. We are going to learn a lot about the definitional bound-
aries of proprietary trading today.
Proponents of Section 619 have made assertions that proprietary
trading, the practice of banks buying and holding securities for
their own accounts, was a key contributor to the financial crisis.
On the contrary, Chairman Volcker himself has admitted that pro-
prietary trading in commercial banks ‘‘was not central to the cri-
sis.’’ I think this raises questions about the size and scope of the
problems that Section 619 is seeking to resolve.
The Federal financial regulators have been tasked with writing
rules to carry out the objectives of Section 619. The result of their
efforts is a proposed rule that is nearly 300 pages long and asks
more than 1,300 questions for comment from market participants.
This has led to significant confusion—I will put myself in that
vote—and many unanswered questions over the consequences of
implementing Section 619.
This morning’s hearing will give members of the Capital Markets
and Financial Institutions Subcommittees the opportunity to better
understand the decision-making process of the Federal agencies.
Our second panel of witnesses will testify to the potential effects
the proposed rules will have not only on financial institutions but
also institutional investors, pension funds, shareholders, and the
American public in general.
I would like to really thank our witnesses for joining us here
today. This is a very serious issue, and the participation of the
principals from the financial regulators is greatly appreciated by
this chairman and the entire committee.
At this point, I would like to yield to the ranking member of the
Financial Institutions Subcommittee, Mrs. Maloney from New
York, for the purpose of making an opening statement.
Mrs. MALONEY. I want to thank the chairwoman for calling this
very important hearing, and to welcome all of our distinguished
guests, particularly two who were former residents of the great
City of New York: Mary Schapiro and Gary Gensler. We look for-
ward to your testimony.
We are here today because of the financial crisis and recession
which cost American families over $17 trillion in household wealth
and business wealth, and over 5.5 million jobs. We are still recov-
ering from this crisis, and a very important part of that recovery
and the Dodd-Frank reform legislation was the Volcker Rule which
we are discussing today, which some believe is the most important
part of Dodd-Frank in terms of preventing another crisis. And I
might add that as recently as September, building on the crisis we
already had, the Swiss bank UBS lost $2.3 billion, thanks to a
rogue unregulated trader; and MF Global, although not a deposi-
tory institution, still cannot find over $1.3 billion. So, we clearly
have a challenge.
This past crisis, like most, was caused primarily by unregulated
areas of the market through loan defaults, unconventional banking
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