Well, isn’t this precious?
When Zions Bank announced last month that it expected to take a big loss because of the Volcker Rule, it set off alarms all over Washington. Regulators scrambled to say they were considering changing the rule, but that was evidently not enough for some legislators.
Representative Jeb Hensarling, a Republican of Texas and chairman of the House Financial Services Committee, is expected to propose a bill that could open up a huge loophole in the rule. The proposed change could allow banks to create and own securities with many types of investments that are barred under the Volcker Rule, which is intended to prohibit speculative trading by banks while letting them both make markets for customers and hedge other investments.
Zions, based in Salt Lake City, said that it expected to post the loss because it owned a large number of collateralized debt obligations that contained trust-preferred securities, known as TruPS, issued by other banks. The bank said it would have to post the loss, which it estimated at $387 million after taxes, because it would no longer be able use an accounting rule that allowed it to keep losses on those securities off its earnings statement, although they were disclosed in footnotes.
That accounting treatment depended on the bank being able to say it expected to retain the securities until they matured, something it would not be able to do if the Volcker Rule would require the sale of the securities, even if the sales could be delayed for several years.
Let’s remind ourselves what legislators like Barney Frank and Christopher Dodd intended the Volcker Rule to do: use accounting rules that allow banks to keep losses those securities off earnings statements (Robert Kaiser’s Act of Congress is an exemplary account of the hearings and final passage). Thanks to these accounting tricks and the collusion of Democratic Leadership Council types, we got the meltdown of 2007-2998, during which in part subprime mortgages served as collateral for these collaterized debt obligations, then certified as AAA by credit agencies and repackaged as more debt. It’s as if the last seven years haven’t happened.