Citi comments on Volcker - Do not mess with us, we will make you pay.

[MrCoffee]

As today marks the end of the comment period on the Volcker Rule, I thought it would be fun to read between the lines a bit and see what the big banks really think of the proprietary trading restriction. Citi submitted their comment dated January 27, 2012. It makes for some fun reading, but I highlighted some relevant passages, so that we can get some insight into what makes big banks happy.

http://www.federalreserve.gov/SECRS/2012/January/20120131/R-1432/R-1432_013012_88700_399129030066_1.pdf

the proper functioning of the over-the-counter municipal securities market from an investor perspective is highly dependent on robust market-making and liquidity intermediation activity by municipal securities dealers, the largest of which are banking entities subject to the Volcker Rule. Moreover, without the liquidity provided by municipal securities dealers, municipal issuers would undoubtedly experience an increase in their financing costs. In light of the structural budget problems already faced by States and other municipal issuers, Citi believes that higher financing costs could have a material and adverse effect on the financial condition of such issuers and their securities. Pg. 1-2

Municipal securities dealers are artificially pumping this market up, and if you try to remove our ability to do that and strip massive profits, we will be sure to pass the savings on to municipalities in the form of higher financing costs (i.e., we own the gun we’ll be sticking to the heads of towns, public utilities, cities, states, schools…you sort of get the idea, right?)

The limitation on the scope of the government obligations exemption would, as currently drafted, impair the ability of banks to engage in activities that are essential to the liquidity of municipal securities, thereby adversely impacting liquidity for investors and the rates that issuers or obligors of such securities would have to pay. Pg. 2

Don’t you get it? If we can’t artificially manipulate the market, we will stick it to the issuers (cities, schools, infrastructure projects, public utilities…you like bridges and flush toilets, right?) so hard they won’t be able to sit right for a month.

It sort of goes into some really dry and tedious number action at this point, but that's all filler for the money shot which is right around the corner...

Increasing funding costs for issuers and obligors of such transactions can have a direct impact on the quality of life for individuals around the country if these projects are curtailed or cancelled. Pg. 10

And there it is. Citi's position is clear: Either gut Volcker or the banks will destroy us all.