Paul Volcker Said What?

The House Financial Services Committee held a hearing today, Experts’ Perspectives on Systemic Risk and Resolution Issues. Paul Volcker testified. Here is his written testimony.

Volcker calls for the separation of banking from commerce and also calls for reforms in executive pay. He also calls for regulation of hedge funds and private equity firms. Volcker also implies that by saving the Zombie banks, the U.S. in fact has encouraged even worse risk taking and highlights these very questions so often written about on this site:

  • Will not the pattern of protection for the largest banks and their holding companies tend to encourage greater risk-taking, including active participation in volatile capital markets, especially when compensation practices so greatly reward short-term success?
  • Are community or regional banks to be deemed “too small to save”, raising questions of competitive viability?
  • Does not the extension of support to non-banks, and even to affiliates of commercial firms, undercut the banking/commerce divide, ultimately weakening the commercial banking system?
  • Will not investors in money market mutual funds find reassurance in the fact that when push came to shove, the Treasury with an extreme interpretation of its authority, took action to preserve those funds ability to meet their declared commitment to pay their investors at par upon demand?

What does Volcker suggest? Well, for one he is saying commercial banks should not be allowed to have ownership in hedge and private equity funds. Another is disallowing proprietary trading.

Without stating it, the above implies Volcker thinks we need to reinstate Glass-Steagall.

He also seems to be making reference to AIG, implying insurance companies should not be saved under systemic risk, more they should be barred from becoming derivatives traders. It's unclear to me if this includes credit default swaps.

Volcker also calls for a strong monitoring of interactions among financial institutions, especially through derivatives and credit default swaps trading.

Volcker also thinks limiting the Federal Reserve is a really bad idea. No surprise there since he once held the Chair position.

The Federal Reserve Board should not become an academic seminar debating in its marble palace various approaches toward monetary policy without the leavening experience of direct contact with, and responsibility for, the world of finance and the institutions through which monetary policy is effected.

Volcker does believe a new Vice-Chair position should be created within the Fed.

Volcker also thinks a body of regulatory agencies under the Treasury is going to be a cast of infighting cats, impossible to herd (my interpretation!)

A council of variegated agencies with their own particular challenges, policies, and constituencies cannot be expected to efficiently and effectively serve as a coordinating body.

I don't know boys and girls, Volcker is really promoting the role of the Federal Reserve as super regulator.

We get some parting shots at Freddie Mac, Fannie Mae as well as the credit rating agencies in the testimony.

In time, Congress must direct its attention to rebuilding the national mortgage market, avoiding, I trust, the now failed approach of mingling private and public responsibilities of so-called Government Sponsored Enterprises.

I also urge consideration of making a national insurance charter available to insurance companies willing to accept Federal prudential standards.

Large issues with accounting and credit rating agencies remain.

There are other bloggers covering these hearings.

Zero Hedge wrote up an analysis on Volcker's testimony. Zero Hedge not only concluded what I did, that Volcker is saying the U.S. must reinstate Glass-Steagall, but also believes Volcker just blasted to hell and back Goldman Sachs.

Volcker highlights "ownership or sponsorship of hedge funds and private equity funds [as] should in my view a heavy volume of proprietary trading with its inherent risks." If that is not a direct stab at Goldman Sachs, nothing is.

The Market Ticker also has a post on Volcker's testimony and comments on Volcker's endorsement of the Fed as super regulator:

The problem with Mr. Volcker's endorsement of The Fed as a continued systemic monitor and regulator is that the Fed has intentionally ignored outrageously predatory behavior, risk-hiding, loss-hiding and even UNLAWFUL activity by some of the banks and financial institutions under its supervision, including but not limited to IndyMac's deposit backdating.

Yeah, as long as you're incorporated and have a white collar it sure does seem you can get away with any brazen theft.

Ritholtz highlights testimony from Volcker on creating a FDIC like conservator, where instead of throwing gobs of taxpayer money at systemically risky institutions, we should wind 'em down and trash 'em.

He also called for a new “resolution regime” for insolvent or failing non-bank institutions of potential systemic importance. Rather than toss trillions at these self-wounded entities, we should instead appoint a special “Conservator” to take control of a bank in clear danger of defaulting on its obligations.

The Conservator should have the authority to negotiate an exchange of debt for new stock to resolve the near insolvent firm, to arrange a sale or merger, or, to arrange an orderly liquidation.

This authority would preempt normal bankruptcy/reorg, justified only by the risk of systemic breakdown.



The problem with giving the Fed more power particularly

regulatory power is accountability. At least, in theory, there is some accountability of elected officials through elections. But the power to appoint and confirm Board of Governors is not enough. It is no mistake that during Alan Greenspan's term , a devote free market fundamentalist, that there was no oversight of financial institutions.

How do you prevent that from happening again?

Obviously the current web of regulators has to change and having a new version of Glass-Steagall will help. - Financial Information for the Rest of Us.

I have been against giving the Fed more power

but on the other hand, I'm looking at Congress and even when you have so many Reps. determined to do something, Congressional leadership plus the Obama administration is "bought and paid for" and basically one cannot get through pretty much anything through Congress.

So, in consideration of this corporate lobbyist Congressional lock, now I'm seeing their legitimate reasoning.

But the real answer is to flush our entire government of corporate "campaign contributions", lobbyists and plain flush the bribe money out of U.S. politics.

But, if you noticed, even the completely ineffectual "say on pay" the Senate has vowed to block that.

They cannot get anything meaningful passed and that's even when I'd claim, Barney Frank is trying, which is a key, to have the committee chair be clearly in the "reform camp".

It's disgusting.

So, with a situation like that it's not surprising they are recommending letting the Fed do end runs on the elected government.

Exactly so!

Right you are. And remember that Greenspan heavily promoted the repeal of Glass-Steagall with the adoption of the Financial Services Modernization Act (Gramm-Leach-Bliley Act) along with the Commodity Futures Modernization Act. And he made big bucks betting on the subprime meltdown with his position at the Paulson hedge fund.

Remember the Greenspan Commission? What a farce that was.

the people who put together regulations, starting in the 1930's

were not socialists. Supposedly they did that so "this can never happen again". I think it was Bryon Dorgan (one of my favorite Senators) who warned on the Senate floor.

There are other regulations which need to be reinstated but it's good to see Volcker really imply what so many others are saying needs to be done on Glass-Seagall.

Yesterday, Geithner refused to list systematically important

or whatever he is calling the financial conglomerates in a congressional testimony. But here is the thing, if passed: will this list be subject to public information and if so, government is definitely creating a tiered system that favors much bigger institutions over smaller ones.

Think about it: if you are an investor - you be nuts not to invest in one of these systematically important institutions because of implicit or possibly explicit government support for that financial conglomerate. WTF!?! - Financial Information for the Rest of Us.

you might consider

writing it up, but this is confusing because are they going to threaten to dissolve systemic risk institutions or are they going to just offer a government guarantee to do whatever they want? Right now, we know it's the latter in a nutshell, but proposals range on the former.

Nominate those you think fit the category

I'd like to see Barney Frank ask Geithmer name-by-name to confirm or deny. Frank's staff should be able to come up with the short list.
Frank T.

Frank T.

Is it any wonder that even

Is it any wonder that even Volcker can not bring himself to say the Fed is part of the problem?

In fact our whole US Government is the Problem!
Gerald Celente is right... there IS going to be a revolution simply because the "Government" has now become the "TERRIORISTS" threatening the common citizen. Errr ...make that --- the Government UNDER the orders of the Wall St wealthy that have bought them completely (YES, and that certainly includes Obama).


Mike Lukovich is one of my favorite political cartoonists. His latest is a good one.