BUSINESS
09/11/2013 11:28 am ET Updated Sep 11, 2013

Greg Smith Rips Wall Street's 'False Argument To Stifle The Volcker Rule'

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Greg Smith, the disgruntled former Goldman Sachs employee, took his problems with the “toxic and destructive” bank to The New York Times last year. This year he’s taking on the entire banking industry.

The former Goldman vice president met with the Securities and Exchange Commission on August 27, according to an SEC memo, to counter Wall Street’s criticisms of the Volcker rule, one of the most controversial components of the 2010 Dodd-Frank financial reform law.

Politico was the first media outlet to report Smith's meeting with the SEC. Goldman declined to comment when contacted by The Huffington Post.

The rule, named after former Federal Reserve chairman Paul Volcker, in theory restricts the types of speculative bets banks can make for their own benefit and with their money, as opposed to their customers' money. Technical term alert: This is called “proprietary trading."

But as the Wall Street Journal reported Tuesday, Wall Street pressure and intense political infighting among regulators have delayed the rule's completion. One meeting between regulators and bank representatives involved a (presumably excruciating) “two-hour discussion of a single phrase relating to ‘market making,’” according to the WSJ. The final version of the Volcker Rule could be more than 900 pages by the time it's done.

To Smith, the idea often pushed by Wall Street types, that the rule would hurt liquidity -- or the ease with which assets can be bought and sold on the market --- is a “false argument to stifle the Volcker rule,” according to a five-point agenda provided before the meeting and documented in the memo.

He also took aim at other Wall Street practices, depicting them as little more than proprietary trading in disguise. According to the memo, he pointed specifically at portfolio hedging -- “it is used as an account for the bank to make macro bets” -- and the perversion of a seemingly benign bank service known as "market making." As he writes:

[M]arket making should be when a customer approaches a bank to facilitate a trade. Today, the bank decides what trade it wants to do -- then it lines up clients to take the other side of the trade. This is no longer market making in my view -- it is akin to proprietary trading[.]

Such disagreements over what type of trading should be restricted by the Volcker rule have been central to why the rule is still not finalized three years after its approval. But to the rule's namesake, Paul Volcker, there is "no reason why the Volcker rule should take three years to write.” The rule began as a one-and-a-half-page idea by the former Fed chairman.

Smith announced his resignation from Goldman in a New York Times op-ed in March of last year. In the piece, he bemoaned what he described as the company's eroding culture, saying the bank typically put client interests after its own desire to make money. Goldman responded that Smith’s personal views did not "reflect the way we run our business."

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