02/14/2012 04:35 pm ET

Volcker Rule Needs To Be Tougher, Former Citi Chair John Reed Says

Amid the hue and cry on Wall Street that the Volcker rule goes too far to restrict banking activities, the former CEO of one giant bank thinks that the Volcker rule doesn't go far enough because it's not sufficiently tough to prevent firms from sneaking their way around the rule.

John S. Reed, who ran Citigroup from 1984 to 2000 and has been an outspoken proponent of financial reform, cited the recent cases of MF Global and UBS in his comment letter to make his case for tougher regulation, writing, "When a firm is focused on market gain, it will employ every available device to achieve those gains -- including taking advantage of clients and putting the firm at risk."

In his own way, Reed was a victim of the deregulatory environment on Wall Street that the Volcker rule aims to rein in. He was ousted soon after Citigroup was created in the wake of the repeal of Glass-Steagall in 1999, allowing banking, securities and insurance firms to merge.

Reed makes several passionate arguments for strengthening the rule, saying that he is "concerned it does not offer bright enough lines or provide strong enough penalties for violation."

Among his recommendations, he suggested:

  • that a firm's senior officers be required to sign a statement each quarter attesting that the firm's trading adheres to the Volcker rule
  • that customized derivatives and structured products not be treated as permissible market-making activity
  • that traders be paid "based on the results of their market-making and hedging activities after those activities are fully unwound"
  • that the rule "should set out specific and vigorous penalties" for traders and firms that do not comply.

Some smaller financial industry players -- such as Ameriprise financial adviser Alice Arant-Cousins in Tempe, Ariz. -- also pushed for a tough version of the rule. In her comment, she requested the SEC "to not bow to the banks, but to draft a strict loophole-free version of the Volcker Rule. ... You are our hope and we are watching."

Obama Budget Gives Slight Bump To Regulators

The Obama administration tends to increase funding for the major regulatory agencies in its proposed 2013 budget, though that bump seems like wishful thinking given the anti-regulatory zeal of House Republicans.

The Commodity Futures Trading Commission -- which now has a bigger workload due to Dodd-Frank and recent scandals like the high-frequency trading saga and the MF Global bankruptcy -- gets a 50 percent budget bump, from $205 million to $308 million. But even one of its own commissioners, Scott O'Malia, though that request is too high, issuing a dissenting statement in which he said it makes an "unsubstantiated case for a massive expansion in staffing that is both unrealistic and unsustainable in this deficit environment."

The Securities and Exchange Commission would see an 18.5 percent increase to $1.566 billion, which would allow for the addition of 676 staffers, including 191 to the enforcement division. But judging by last year's experience, that won't likely happen -- the $1.4 billion requested for 2012 was knocked down to $1.321 billion amid congressional wrangling.

The Consumer Financial Protection Bureau -- which has been the subject of partisan fighting all year long -- has requested $448 million, though it estimates it will spend only $356 million this year. CFPB director Richard Cordray is sure to be grilled during a House subcommittee hearing on Wednesday by lawmakers who challenged the very creation of the bureau.

The Nuclear Regulatory Commission, after several years of budget declines, will stay largely flat at $1.053 billion. But amid renewed concerns over the safety of the country's reactors in the wake of last year's earthquake in Japan, the Nuclear Reactor Safety Program budget rises to $809 million, an $8 million increase over last year's budget.

The Environmental Protection Agency, which has become a punching bag on the campaign trail during the Republican primary, will see a $105 million decrease from last year's $9 billion.

The Occupational and Safety Health Administration gets a slight $680,470 increase to $565.4 million, but that includes a $4.8 million boost for the agency's whistleblower program.

And the Food and Drug Administration's budget also remains relatively flat, though it includes a big increase in user fees, which are paid by companies whose products are regulated by the agency.

Inspectors Told To Ignore Moldy Food

Make sure you avoid lunch while you read this story.

Federal inspectors from the Department of Agriculture were told by their superiors to ignore thousands of gallons of moldy food at a plant in Washington state, reported KING-5 TV.

"I thought it was terrible because I have never seen anything like that in my life," retired inspector Jerry Pierce told the station, referring to Snokist Growers, where public records show that 23,000 gallons of moldy applesauce were reprocessed in 2010.

The USDA explained that the agency had limited authority to stop such shipments, though it added that the plant is under investigation.

Quick Hits

  • When the Pentagon's top weapons buyer remarked last week that the military might bail out struggling defense contractors, eyebrows raised. "We have to be prepared to intervene where it makes sense, where we have to," said Frank Kendall, referring to Defense Department's desire to shrink procurement budgets. Most of the analysts interviewed by the National Journal were against the idea, some citing the unpopular bank bailouts of 2008. "We should not engage again in 'bailing out' another industry," one insider told the publication.

  • Lay off Mary Shapiro, the current SEC chair who has been criticized for not cracking down more on Wall Street crimes and misdemeanors. That was the message of former SEC Chair David Ruder, who forcefully defended Shapiro in an interview with Ruder helped the government win its high-profile indictment of junk bond king Michael Milken in the late 1980s.

  • A coalition of occupational safety and health groups are urging President Obama to speed up the review of an updated standard to protect workers from occupational exposure to crystalline silica. The dust particle, which can cause lung disease and has been associated with lung cancer, chronic renal disease and autoimmune disorders, is exposed to an estimated 1.7 million U.S. workers.