The MF Global implosion provided a tempting opportunity to weigh in on the proposed, still-in-the-works Volcker Rule. No less than Sheila Bair, the highly respected former head of the FDIC, took the moment to offer her thoughts.

In a Fortune commentary, she notes that MF Global, which did not have any insured deposits, would not have even been subject to the rule. But for the sake of discussion, she assumes the opposite. This allows her to point out that the repo transactions that Jon Corzine described in his Congressional testimony would generally be allowable under the new rule. So the rule wouldn't have stopped the bank from loading up unwisely on European sovereign debt.

Bair finds this disconcerting, but not as disconcerting as what the Volcker Rule has become. The idea sounds simple--to ban proprietary trading. But the details are the key, and they have proven all too devilish. She calls the current incarnation of the rule "a 300-page Rube Goldberg contraption of a regulation."

The complexity is stunning to be sure. Fortunately, she has a solution, which many critics have lacked.

"Regulators should scrap the mind-boggling complexity in the proposed rule and focus instead on the underlying economics of a transaction. If the transaction makes money the old-fashioned way--the customer paying the institution for a service through interest, fees, and commissions--then it passes the test. If profitability (or loss) is driven by the direction of markets, then it fails. Inevitable gray areas, such as marketmaking, need to be done outside of the insured bank and be supported by a truckload of capital. Securities firms should be allowed to maintain adequate inventory to make liquid markets. Most important, regulators should tell executives and boards that they will be held personally accountable for monitoring and compliance. Bank leadership must make clear to employees that they are supposed to make money by offering good customer service, not by speculating with the firm's funds."

Well put.

For more:
- here's the commentary    

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