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The Volcker Rule

To continue the trend of not writing about wingnut forwards (haven’t received any in a while), I want to address the Volcker Rule today. A financial reform bill is clearly badly needed, and one of the important items in this bill is this little piece called the Volcker Rule. On its face, it sounds like a great idea: limit the investment activities of FDIC-insured commercial banks. But those of us who bank or insure through USAA got an email last night urgently asking members to take action to modify this rule.

Here’s what USAA wrote:

Dear Mr. Heckel:

Rarely in our 87-year history have we turned to USAA members to weigh in with elected representatives on an issue of great importance. But, we are now.

The U.S. Senate currently is considering legislation (S.3217) that would impose new rules on the nation’s financial services industry, including USAA.

As the leading provider of financial services to America’s military community, USAA supports financial services reform.

However, the current Senate bill would disproportionally impact USAA because we are a unique and fully integrated association. USAA is not like the banks and other companies that helped bring down our economy, and we never took a penny of TARP funds. We do not engage in the harmful practices this legislation seeks to resolve.

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.*

So, we are asking all USAA members and employees to urge their U.S. senators to amend a portion of the bill, known as the “Volcker Rule,” to eliminate its effect on a company like USAA. Please know that this legislation does not impact individual member’s investments.

Regardless of the outcome of the legislation, USAA will remain a unique and enduring association that’s all about you — the military and their families.

Please take action on this matter by immediately contacting your U.S. senator. You may click here to access a special website that will enable you to quickly send an e-mail message to your senator.
Thank you for your help and support,
Joe Robles Signature
Josue (Joe) Robles Jr.
Major General, USA (Ret.)
President and CEO

Unfortunately, the detail mostly stopped there. I spent a good bit of time last night trying to understand what is going on with this, and, well, it wasn’t entirely clear. Still, in the end, I chose to go ahead and send a message on USAA’s behalf. Why?

First, what is USAA? The United Services Automobile Association started as an auto insurance company in 1922 by Army Officers who were having difficulty obtaining insurance. Not long thereafter, it opened membership to all services in the armed forces. It eventually branched out into other types of insurance, banking, and investments. Business was conducted entirely through mail for many years, and eventually moved to telephone service, then internet. USAA does not have any traditional bank branches or its own ATM machines; unlike your bank, however, this isn’t a problem. It doesn’t charge ATM fees to members, and it refunds fees charged by other banks. It received no TARP bailout money. USAA insurance premiums are quite low, and their investment returns are pretty good. When the new credit card rules went into place, USAA went a step further and– while late payment fees still exist– stopped increasing late payment interest rates. Profits from the insurance side of the business are returned to members quarterly. It is consistently rated as having the best customer service of any company in the United States. Seriously.

In short, USAA generally does everything right for their customers, and they’re certainly not doing anything shady with FDIC-insured deposits.

USAA is unique in the US, though (or nearly so– State Farm also would run afoul of the Volcker Rule). Because they provide a full array of financial services, this also means they can run into unique problems.  Specifically, the Volcker Rule would affect them because insurance premiums are invested into higher risk (but still not actively shady)/higher yield investments. So their insurance premiums would necessarily increase due to the fact that USAA has both banking and insurance arms.

Now, unfortunately, the email that USAA sent out was a bit light on the details. As such, they’re taking some flack for it: USAA’s anti-finreg campaign. This is not entirely undeserved– except for calling USAA anti-financial regulation– because while USAA did provide more information ( see http://tinyurl.com/32ny6r2 ), it’s still not quite enough. And honestly, when you search for information about the Volcker Rule, it’s hard to find a clear explanation of what’s going on with it.  So here’s my attempt to explain what the fuss is about:

The Volcker Rule aims to prevent FDIC-insured banks from risky investments, and the subtext seems to be that this would bring the investment arms of these banks into line– or encourage the banks to completely close up the investment shops attached to them. While the idea is perhaps good on its face, it seems way underspecified so that it hits places like USAA, and perhaps overly restricting in that it cuts off a lot of reasonable investment activity which, while riskier than government bonds, are still not shady financial products. And other things I’ve been reading have suggested that it wouldn’t actually do a whole lot of good, given that it wouldn’t apply to some of the major offenders, since they’re not depository banks. (The other things I’ve been reading: The Volcker rule ).

In addition, my friend Branen Salmon adds:

The impression I get is that this is a response to some depository banks investing FDIC-backed deposits in an attempt to make mad dollaz, thus hitting the FDIC hard when their risky investments hit the skids. It’s true that a lot of the major offenders of the recent mess were not depository banks (though a few were). Also, to the best of my understanding, USAA’s proprietary investments are performed solely with its insurance capital, not with its deposits, and I believe that several states exert tight regulation on insurance capital investments.

So that, as near as I can tell, is what the Volcker Rule does, and how it affects USAA. Based on all of this, as well as USAA’s strong customer service record and general competence, are the reason that I decided to support USAA’s campaign to have the Volcker Rule modified to prevent it from negatively impacting their business.

If I’ve gotten anything wrong here, please let me know. While I’m confident that this information is basically correct, I realize it is unlikely to be perfect– though at least it should be a more clear explanation of what’s going on with this issue.

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