As many of you know, Congress passed a statute 3 years ago to prevent a future financial meltdown as we witnessed in 2008.  That statute is the unwieldy 2,300 page law known as the Dodd-Frank Act.  A major component of that statute was the prevention of banks from investing funds in risky investments in the equity and derivative markets.  That component was nicknamed “the Volker Rule” after its main proponent, former Federal Reserve Chairman Paul Volker.

Yesterday the regulations to enforce the Volker Rule were set forth for the public.  The short description of the rule is that banks cannot speculatively trade their own funds (i.e. using deposits) nor can they invest in or own hedge funds or private equity funds.  That description is easy and understandable and should be enforceable.

However, a simple concept can be made unenforceable by overly complex regulations.  We have seen this with the Sarbanes-Oxley Act.  The statute that would jail executives who issued statements that turned out to be false is simple and understandable.  The 66 page Act was cited as a preventative for a financial meltdown and when the meltdown occurred many in academia discussed the criminal penalties that would be leveled against many executives.  Although, during the 2008 meltdown many statements issued by companies and their executives turned out to be false but not one executive was jailed because the statute was found to be too complex to enforce.

The government in its infinite wisdom comes up with an even more complex method to regulate the Volker Rule.  This regulation alone amounts to 867 pages!  The scope of the rules and the complexity to set out a prohibition of trading probably makes the Volker Rule too complex to enforce, which means we have paved the way for financial institutions to collapse again!