Banks Cling to Bundles Holding Risk

APRIL 19, 2014 GRETCHEN MORGENSON New York Times

Some $431 billion worth of C.L.O.s currently exist.

The Volcker Rule doesn’t go into effect until 2015, but that hasn’t stopped big bankers and their supporters in Washington from trying to undermine it.  The Volcker Rule was intended to bar banks with insured deposits from making large and risky trading bets. The rule was lawmakers’ attempt to reinstate some of the taxpayer protections lost when Congress gutted the Glass-Steagall Act in 1999.

The latest fight involves another complex Wall Street creation, a financial instrument known as a collateralized loan obligation. Big banks want to be allowed to own them but regulators say such holdings can be hazardous and may allow the banks to evade the Volcker Rule’s prohibition on risky trading.

There have been countless battles over the Volcker Rule since it was first conceptualized in the Dodd-Frank law in 2010. Paul A. Volcker, the former Federal Reserve chairman for whom the rule is named, hasn’t talked about most of these fights, but this one is important enough that he has come forward to discuss it.

“This constant effort to get around the rule limiting banks’ investment in hedge funds, on behalf of a few institutions who apparently want room to resume the financing practices that got us into trouble in the past, really should end,” Mr. Volcker said in a statement last week.

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What are collateralized loan obligations, or C.L.O.s? Translated into simple English, they are bundles of mostly commercial loans that are sold in various pieces to investors. They are similar to collateralized debt obligations, or C.D.O.s — those instruments that imperiled so many institutions in 2008