Sen. Christopher Dodd insists that his financial reform bill is aimed at Wall Street companies. But USAA, the well-known financial-services company for members of the U.S. military and their families, is worried that it will wind up caught in the Dodd bill dragnet.
In a rare move, USAA CEO Joe Robles recently sent an email to each of its members, asking them to contact their representatives in Washington and urge them to make a certain change to the Dodd bill. Specifically, Robles hopes to amend the portion of the bill known as the “Volcker Rule” so that it won’t affect USAA.
As the USAA website notes in a follow-up blog, the Volcker Rule “gives regulators the discretion to limit and prohibit certain investment activities of financial services companies, like USAA. In particular, this bill directs regulators to prohibit government insured depository institutions from engaging in ‘proprietary trading,’ whereby a company trades for its own account.”
According to Robles:
If unchanged, the bill would:
- Prevent USAA from managing the association’s portfolio as we have for the past 87 years.
- Jeopardize our ability to continue offering many of our competitive products.
- Limit our ability to return money to our members. Last year, USAA returned $1.2 billion to our members in the form of distributions, dividends, and bank rebates and rewards.
In short, under the Dodd bill, USAA could forget about making investments that offer the prospect of a healthy return.
Robles would apparently be content if an exception for USAA can be carved out. But as Heritage’s David John has pointed out, there are much bigger problems with the Volcker Rule. It would do nothing to improve the stability of the banking system today — and it would have done nothing to prevent the 2008 financial crisis, or even lessen its impact. As John notes, none of the major financial firms that had to be rescued were in trouble because they had engaged in proprietary trading.
The real problem with Bear Stearns, Lehman Brothers and AIG was the way they and their investment products were interconnected to every other significant world financial institution. The Volcker Rule would do nothing to reduce that interconnectedness.
The Rule would, however, restrict the size of U.S. banks. But as John points out, far from improving their financial health, imposing size restrictions through fiat “would simply mean that they would be unable to finance large investments by major corporations without teaming up with other financial institutions. This additional complexity and cost would make it harder for U.S. financial institutions to compete with major European and Asian banks.”
USAA is surely on to something with its concern about the Volcker Rule. But this debate is bigger than any one institution. It’s about a huge bill (1,408 pages) with scores of provisions that would hurt consumers and the economy — and make future bailouts all but certain. And as the USAA case underscores, it’s about the law of unintended consequences.