(c) 2009 F. Bruce Abel
These blogs by Simon Johnson and Jim Kwak are excellent today. worth your reading for detail.
By the way, I see no discussion anywhere that the reason Goldman must pay those high bonuses is to prevent its traders from going elsewhere and "trading against their (complex, only they know) book." It's as though Robert Oppenheimer said, "I think I'll go to Moscow now."
The Baseline Scenario
Dan Tarullo Gets New Talking Points
Financial Regulation on the Front Burner?
Too Complicated to Work
Dan Tarullo Gets New Talking Points
Posted: 23 Oct 2009 02:15 AM PDT
On Wednesday, Dan Tarullo, a governor of the Federal Reserve and distinguished law school professor, dismissed breaking up big banks as “more a provocative idea than a proposal” and instead put almost all his eggs in the “creation by Congress of a special resolution procedure for systemically important financial firms”. He stressed: “We are hopeful that Congress will, in its legislative response to the crisis, include a resolution mechanism and an extension of regulation to all systemically important financial institutions” (full speech).
This put him strikingly at odds with Mervyn King, governor of the Bank of England, who said Tuesday night, quite bluntly,
“There are those who claim that such proposals [involving breaking up the largest banks] are impractical. It is hard to see why. Existing prudential regulation makes distinctions between different types of banking activities when determining capital requirements. What does seem impractical, however, are the current arrangements. Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.”
Tarullo’s speech actually framed today’s problem just right: “I would suggest … that the reform process cannot be judged a success unless it substantially reduces systemic risk generally and, in particular, the too-big-to-fail problem.” This is consistent with the tone of King’s remarks (even if less pointed than what Neal Barofsky said).
Tarullo also made some astute comments on how “too big to fail” emerged in its current specific form in the US and threatens us in a general form always.
“First, no matter what its general economic policy principles, a government faced with the possibility of a cascading financial crisis that could bring down its national economy tends to err on the side of intervention. Second, once a government has obviously extended the reach of its safety net, moral hazard problems are compounded, as market actors may expect similarly situated firms to be rescued in the future.” ….
“The fact that the largest financial firms will account for a significantly larger share of total industry assets after the crisis than they did before can only add to the uneasiness of those worried about the too-big-to-fail phenomenon. It is notable that current law provides very little in the way of structural means to limit systemic risk and the too-big-to-fail problem.”….
“I only urge that we all keep the too-big-to-fail problem front and center as the regulatory reform effort moves forward.”
But the “resolution authority” idea the Obama administration is pushing (and Tarullo endorsed) is a theoretical construct that would have no discernible practical effect. Charles Calomiris hit that particular nail on the head Tuesday in the WSJ – in his second paragraph, he explains that bank failures are hard to handle because “there is no orderly means for transferring control of assets and operations, including the completion of complex transactions with many counterparties perhaps in scores of countries via thousands of affiliates” (emphasis added).
The Bank of England will tell you, for example, that their experience with BCCI – a bank that was closed nearly two decades ago – pointed clearly to the need for cross-border agreement between regulators on exactly how to handle bank failure.
But talk to any dozen or so central bank officials, and they will confirm that we do not have and are not close to having such cross-border agreements. And there is no sign that the G20 has this issue in its sights.
Still, the Tarullo-King gap – which loomed so large on Wednesday – finds potential closure in the Fed’s proposed “guidance” (read: orders) on executive compensation, announced Thursday. (WSJ; FT versions).
The proposal is obviously flawed, particularly in the quaint notion that there are only 28 financial institutions that can damage the system through excessive risk-taking (has the Fed really forgotten LTCM?) And the stock market yawned deeply on the announcement – presumably believing that the Fed cannot currently organize a regulatory tightening along any dimensions.
But the proposal is actually quite brilliant and – given the logic of our politics, including Mr. Bernanke’s impending re-confirmation hearing – is likely to have real impact.
For the first time, the appropriate regulators have recognized that excessive risk-taking generates a large negative externality, i.e., a spillover that has pernicious effects on the rest of the economy, and that this can be dealt with in a reasonable manner.
Attacking compensation is not the only way (nor ultimately the likely best way) to address this externality, but it does get everyone thinking along the right lines.
And the bottom line is clear: if your financial institution is big relative to the system, you will be at a systematic disadvantage relative to the smaller firms due to the way pay is regulated; “talent” (or, if you prefer, excessive risk-takers) will move from large firms to small.
My read of the Fed’s current intentions is that they do not intend the differential tax on size to be too great, so dangerously big firms could still survive. But once Capitol Hill understands the opportunity created by these compensation rules, all things are possible – think about the transparency and accountability implications for the Fed and the banks in question.
And remember two things: the midterm elections at the end of next year still lack an obvious and appealing theme, and the big banks are completely unable to cut back voluntarily on their compensation practices, their lobbying, or their egregious public behavior and obnoxious remarks (e.g., the latest AIG example).
The Fed’s press release quotes Dan Tarullo as saying, “In customizing the implementation of our compensation principles to the specific activities and risks of banking organizations, we advance our goal of an effective, efficient regulatory system.”
My translation: Now it gets interesting.
By Simon Johnson
Financial Regulation on the Front Burner?
Posted: 22 Oct 2009 07:16 PM PDT
Nate Silver thinks that financial regulation will be the big political issue of the first half of next year. And for better or for worse, he thinks the central political issue — the “public option,” if you will — will be TBTF and breaking up banks.
I have been skeptical of this. I have been following the conventional wisdom that public anger has receded into confusion, health care has taken over the stage, and no one can get interested in financial regulation — it’s just too boring. Also, I thought the fact that financial regulation doesn’t break down along party lines hurts its popular appeal. In particular, it leaves liberal Democrats very confused (conservative Republicans have an easier time — oppose anything Obama wants). But I suppose I could see breaking up banks — now that it’s come back from several months in the wilderness — becoming a rallying issue. And health insurance is intrinsically boring, too. In any case, Nate Silver knows politics a lot better than I do.
(Also, according to Silver, we are “Volckerists” and the other side are the “Summersists.” We could do worse.)
By James Kwak
Too Complicated to Work
Posted: 22 Oct 2009 06:58 PM PDT
Yves Smith has a long excerpt from testimony by Robert Johnson before the House Financial Services Committee on regulation of OTC derivatives. (Johnson’s testimony is not up at the committee site.) Johnson brings together the issues of too big to fail and derivatives regulation: “Absent a drastic simplification of derivative exposures and a transparent and comprehensive improvement in the monitoring of those positions when imbedded in large firms, complex derivatives render these behemoth institutions Too Difficult to Resolve (TDTR).”
In short, he argues that even if you give regulators the ability to “resolve” a Tier 1 financial institution in the event of a crisis, regulators will be afraid to pull the trigger as long as there is still this complicated web of non-standardized derivatives linking it to the rest of the financial system. In addition, this creates a bizarre incentive: if you think that you can escape being shut down by having an intimidatingly complex derivatives portfolio, then you will go out and create such a portfolio.
I think there is a real risk in financial regulation that it becomes too technical and technocratic. We already know that the people who are into finance, economics, and economic policy are suckers for complicated models — the new flavors are contingent capital and size-based capital requirements. But we have to weigh their theoretical elegance against the chances that they will not work, or will be overridden by other considerations, in a crisis. For example, here’s Mervyn King on contingent capital:
“[E]xperience has shown that it is difficult to assess risks of infrequent but high-impact events, and so it is dangerous to allow activities characterised by such risks to contaminate the essential – or utility – services that the banking sector provides to the wider economy. Both of these drawbacks mean that it is almost impossible to calculate how much contingent capital would be appropriate.”
In other words, since crises are by definition tail events, there is no good way to estimate the amount of contingent capital that will be needed beforehand, so there is a high risk that financial institutions won’t have enough and we’ll be left where we are today. Assuming perfect regulation is no different from assuming any other can opener.
By James Kwak
Showing posts with label too big to fail. Show all posts
Showing posts with label too big to fail. Show all posts
Saturday, October 24, 2009
Thursday, October 22, 2009
Volker's Ideas
(c) 2009 F. Bruce Abel
A good read. And read the comments too. Volker is a voice from the past and somehow reminds me of dear friend Bill Herron who died too young about 6 years ago.
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Volcker’s Voice Fails to Sell a Bank StrategyOctober 21, 2009, 2:49 am — Updated: 1:17 pm -->
Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis, Louis Uchitelle wrote in The New York Times.
“The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to Mr. Obama since their Chicago days. “Whenever he has advice, the administration is very interested.”
Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.
He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.
“I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.”
Still, he does head the president’s Economic Recovery Advisory Board, which makes him the administration’s most prominent outside economic adviser. As Fed chairman from 1979 to 1987, he helped the country weather more than one crisis. And in the campaign last year, he appeared occasionally with Mr. Obama, including a town hall meeting in Florida last fall. His towering presence (he is 6-foot-8) offered reassurance that the candidate’s economic policies, in the midst of a crisis, were trustworthy.
More subtly, Mr. Obama has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers.
For all these reasons, Mr. Volcker’s approach to financial regulation cannot be just brushed off — and Mr. Goolsbee, speaking for the administration, is careful not to do so. “We have discussed these issues with Paul Volcker extensively,” he said.
Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.
The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.
Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.
“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.
The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.
Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail.
On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.
Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal.
“People say I’m old-fashioned and banks can no longer be separated from nonbank activity,” Mr. Volcker said, acknowledging criticism that he is nostalgic for an earlier era. “That argument,” he added ruefully, “brought us to where we are today.”
He may not be alone in his proposal, but he is nearly so. Most economists and policy makers argue that a global economy requires that America have big financial institutions to compete against others in Europe and Asia. An administration spokesman says the Obama proposal for reform would result in financial institutions that could fail without damaging the system.
Still, a handful side with Mr. Volcker, among them Joseph E. Stiglitz, a Nobel laureate in economics at Columbia and a former official in the Clinton administration. “We would have a cleaner, safer banking system,” Mr. Stiglitz said, adding that while he endorses Mr. Volcker’s proposal, the former Fed chairman is nevertheless embarked on a quixotic journey.
Alan Greenspan, the only other former Fed chairman still living, favored the repeal of Glass-Steagall a decade ago and, unlike Mr. Volcker, would not bring it back now. He declined to be interviewed for this article, but in response to e-mailed questions he cited two recent public statements in which he suggested that the nation’s largest financial institutions become smaller, so that none would be too big to fail, requiring a federal rescue.
Taking issue implicitly with the Volcker proposal to split commercial and investment banking, he has said: “No form of economic organization can fully contain bouts of destructive speculative euphoria.”
For his part, Mr. Volcker is careful to explain that he supports 80 percent of the administration’s detailed plan for financial regulation, including much higher capital requirements and “guidelines” on pay. Wall Street compensation, he said in a recent television interview, “has gotten grotesquely large.”
Before the credit crisis, the big institutions earned most of their profits from proprietary trading, and those profits led to giant bonuses. Mr. Volcker argues that splitting commercial and investment banking would put a damper on both pay and risky trading practices.
His disagreement with the Obama people on whether to restore some version of Glass-Steagall appears to have contributed to published reports that his influence in the administration is fading and that he is rarely if ever in the small Washington office assigned to him.
He operates from his own offices in New York, communicating with administration officials and other members of the advisory board mainly by telephone. (He does not use e-mail, although his support staff does.) He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern.
So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.
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7 Comments
1. October 21, 2009 6:06 am Link
“I did not have influence to start with,” he said.
That I am afraid in itself is very depressing to hear.
To Date the Administration has bet with the Banks. They have overdosed the Banks on a Golden Flood of Free Liquidity and the markets have risen on this rising Tide. At some Point, the Liquidity will need to be withdrawn and that Day of Reckoning can not be put off for ever.
It is in the NationaL Interest to have a robust and muscular Banking System. And now we have a Bunch of High Rollers, who had all the Cash just when the Tables were fixed in their Favour.
Volcker has been a Voice of Sanity in a sort of Looking Glass World and President Obama really needs him very close because if it unwinds again, the current Team will be like the Emperor with no Clothes and nowhere to run to.
Aly-Khan Satchuhttp://www.rich.co.ke/Twitter alykhansatchu— Aly-Khan Satchu
2. October 21, 2009 6:40 am Link
Volker’s advice is sound but the Baby Boomer juveniles and their progeny running the show are emotionally incapable of practicing delay of gratification, thrift and economic common sense.
I remember Volker’s 1970s bitter economic medicine. He got his way because the government and the opinion makers were mostly grownups shaped by the Depression.
Born just before war the folks born after me always seemed more than little nuts to me.— MARK KLEIN, M.D.
3. October 21, 2009 8:15 am Link
Please keep talking Mr. Volcker ; Your wisdom is sorely needed by the Obama administration which has been blinded by the promise of political contributions dancing in their heads.It’s time to put the genie back in the bottle: In light of everything we’ve gone through, it’s amazing that the obvious needs to be so belaboured.— pete
4. October 21, 2009 8:15 am Link
Paul Volcker is 100% right. Legislation to implement what he proposes would have significant support across party lines in Washington. Furthermore, the public would welcome this action.While I applaud the Obama ((NYTimes, why have you not corrected your Spell Check to accept the word “Obama as correct? This is negligent. Fix it)) Administration for just about all of its initiatives, I note that it has a deplorable tendency of nibbling around the edges of urgent situations where swift and bold action is called for. What we have here is an example of this.— C. Alexander Brown, Rockcliffe Park, Canada
5. October 21, 2009 8:19 am Link
Anyone see Frontline’s “Warning” last night? Diff stations, diff dates and times. Intellectual vindication! She was RIGHT! The folks who told Brooksley to SHUT UP, Congress, Greenspan, the President’s Working Group looking like they would CRY or refusing to be interviewed. You little bucket shop chickens, Larry and Robert! Go to your rooms and don’t come out until I can look at you all without wanting to charge you with treason. Like that’s ever gonna happen.
Ignore this man Volcker’s advise at your own peril! He’s absolutley RIGHT! After watching that show, I’m ready to follow Volcker around and repeat his every word like Garret Morris’s SNL character would repeat Chevy Chase at the end of the news for the Hard of Hearing. “Ferdinand Franco is still DEAD! Our Banks are MONOPOLOIES! Even Brooksley swears this vile economic pumping and dumping is never gonna stop! Break them UP! BREAK them UP! BREAK THEM UP!”
Looks like Obama’s going down like Wilson, and Volcker’s going down like Veblen. Our Congress and President need to come forward and admit the reason they aren’t doing anything is because this is a giant Jenga puzzle built of circus peanuts and just fixing it is going to blow us all to hell. Well, I knew it was coming, but I don’t care anymore, thank Wilco. LET HER BLOW!
Ah! Get back in your rooms Clinton, Lugar, Gramm, ALL of you miserable excuses for government. Sorry, Dealbook. I put this all together myself over the past year and have been trying to say it repeatedly only to discover I’M NOT CRAZY! Now, I know how Brooksley feels. Obama, give that woman your Nobel! Then crawl to Volcker and do what he says. He’s not some weak guy behind a curtain. He IS that flaming giant head, and you better do what he says!— Abby Tucson, AZ
6. October 21, 2009 9:12 am Link
Yes Yes Yes. The most sound reasoning I have heard. I am SICK AND TIRED OF WALL STREET PLAYING WITH MY MONEY , MAKING PROFIT ON MY MONEY THEN bankrupting the system and taking my house. WHy not separate commercial and investment banking? It should always have been this way . What happened to Brookesly Born. There was one of the only voices o f reason in the past decade. Speaking alone as usual. IN MY AMERICA NOW, MONEY TALKS LOUDER THAN PRINCIPLE OR THE GREATER GOOD FOR ALL. Frustrated American.— Judy Leonard
7. October 21, 2009 6:02 pm Link
What is truly depressing about what happened to Brookesly Born is that there was never a honest effort to discuss the issues by the Greenspan-Summers-Rueben group. They knew they were right and didn’t want to be confused by any other logic than their own.
Think a minute about the vaulted “magic” hand of the market. In a market the best wins because consumers choose the best. This implies an informed decision. When you are choosing to buy derivatives that by definition are opaque it is not possible to make an informed decision. It seems that at a minimum some standards need to be set for reporting if the market is to have a chance of working. That the Greenspan gang blocked all attempts at even the most reasonable requirements is an indictment of their judgement. That the current administration is depending on Lawrence Summers for guidance is troubling to say the least.
I do appreciate that Mr. Greenspan has at least partially admitted to errors in judgment. Unfortunately, Mr. Greenspan errors have hurt us all and the most vulnerable of us have been hurt the most.— Bill MacAllister
A good read. And read the comments too. Volker is a voice from the past and somehow reminds me of dear friend Bill Herron who died too young about 6 years ago.
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Volcker’s Voice Fails to Sell a Bank StrategyOctober 21, 2009, 2:49 am — Updated: 1:17 pm -->
Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis, Louis Uchitelle wrote in The New York Times.
“The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to Mr. Obama since their Chicago days. “Whenever he has advice, the administration is very interested.”
Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.
He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.
“I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.”
Still, he does head the president’s Economic Recovery Advisory Board, which makes him the administration’s most prominent outside economic adviser. As Fed chairman from 1979 to 1987, he helped the country weather more than one crisis. And in the campaign last year, he appeared occasionally with Mr. Obama, including a town hall meeting in Florida last fall. His towering presence (he is 6-foot-8) offered reassurance that the candidate’s economic policies, in the midst of a crisis, were trustworthy.
More subtly, Mr. Obama has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers.
For all these reasons, Mr. Volcker’s approach to financial regulation cannot be just brushed off — and Mr. Goolsbee, speaking for the administration, is careful not to do so. “We have discussed these issues with Paul Volcker extensively,” he said.
Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.
The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.
Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.
“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.
The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.
Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail.
On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.
Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal.
“People say I’m old-fashioned and banks can no longer be separated from nonbank activity,” Mr. Volcker said, acknowledging criticism that he is nostalgic for an earlier era. “That argument,” he added ruefully, “brought us to where we are today.”
He may not be alone in his proposal, but he is nearly so. Most economists and policy makers argue that a global economy requires that America have big financial institutions to compete against others in Europe and Asia. An administration spokesman says the Obama proposal for reform would result in financial institutions that could fail without damaging the system.
Still, a handful side with Mr. Volcker, among them Joseph E. Stiglitz, a Nobel laureate in economics at Columbia and a former official in the Clinton administration. “We would have a cleaner, safer banking system,” Mr. Stiglitz said, adding that while he endorses Mr. Volcker’s proposal, the former Fed chairman is nevertheless embarked on a quixotic journey.
Alan Greenspan, the only other former Fed chairman still living, favored the repeal of Glass-Steagall a decade ago and, unlike Mr. Volcker, would not bring it back now. He declined to be interviewed for this article, but in response to e-mailed questions he cited two recent public statements in which he suggested that the nation’s largest financial institutions become smaller, so that none would be too big to fail, requiring a federal rescue.
Taking issue implicitly with the Volcker proposal to split commercial and investment banking, he has said: “No form of economic organization can fully contain bouts of destructive speculative euphoria.”
For his part, Mr. Volcker is careful to explain that he supports 80 percent of the administration’s detailed plan for financial regulation, including much higher capital requirements and “guidelines” on pay. Wall Street compensation, he said in a recent television interview, “has gotten grotesquely large.”
Before the credit crisis, the big institutions earned most of their profits from proprietary trading, and those profits led to giant bonuses. Mr. Volcker argues that splitting commercial and investment banking would put a damper on both pay and risky trading practices.
His disagreement with the Obama people on whether to restore some version of Glass-Steagall appears to have contributed to published reports that his influence in the administration is fading and that he is rarely if ever in the small Washington office assigned to him.
He operates from his own offices in New York, communicating with administration officials and other members of the advisory board mainly by telephone. (He does not use e-mail, although his support staff does.) He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern.
So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.
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7 Comments
1. October 21, 2009 6:06 am Link
“I did not have influence to start with,” he said.
That I am afraid in itself is very depressing to hear.
To Date the Administration has bet with the Banks. They have overdosed the Banks on a Golden Flood of Free Liquidity and the markets have risen on this rising Tide. At some Point, the Liquidity will need to be withdrawn and that Day of Reckoning can not be put off for ever.
It is in the NationaL Interest to have a robust and muscular Banking System. And now we have a Bunch of High Rollers, who had all the Cash just when the Tables were fixed in their Favour.
Volcker has been a Voice of Sanity in a sort of Looking Glass World and President Obama really needs him very close because if it unwinds again, the current Team will be like the Emperor with no Clothes and nowhere to run to.
Aly-Khan Satchuhttp://www.rich.co.ke/Twitter alykhansatchu— Aly-Khan Satchu
2. October 21, 2009 6:40 am Link
Volker’s advice is sound but the Baby Boomer juveniles and their progeny running the show are emotionally incapable of practicing delay of gratification, thrift and economic common sense.
I remember Volker’s 1970s bitter economic medicine. He got his way because the government and the opinion makers were mostly grownups shaped by the Depression.
Born just before war the folks born after me always seemed more than little nuts to me.— MARK KLEIN, M.D.
3. October 21, 2009 8:15 am Link
Please keep talking Mr. Volcker ; Your wisdom is sorely needed by the Obama administration which has been blinded by the promise of political contributions dancing in their heads.It’s time to put the genie back in the bottle: In light of everything we’ve gone through, it’s amazing that the obvious needs to be so belaboured.— pete
4. October 21, 2009 8:15 am Link
Paul Volcker is 100% right. Legislation to implement what he proposes would have significant support across party lines in Washington. Furthermore, the public would welcome this action.While I applaud the Obama ((NYTimes, why have you not corrected your Spell Check to accept the word “Obama as correct? This is negligent. Fix it)) Administration for just about all of its initiatives, I note that it has a deplorable tendency of nibbling around the edges of urgent situations where swift and bold action is called for. What we have here is an example of this.— C. Alexander Brown, Rockcliffe Park, Canada
5. October 21, 2009 8:19 am Link
Anyone see Frontline’s “Warning” last night? Diff stations, diff dates and times. Intellectual vindication! She was RIGHT! The folks who told Brooksley to SHUT UP, Congress, Greenspan, the President’s Working Group looking like they would CRY or refusing to be interviewed. You little bucket shop chickens, Larry and Robert! Go to your rooms and don’t come out until I can look at you all without wanting to charge you with treason. Like that’s ever gonna happen.
Ignore this man Volcker’s advise at your own peril! He’s absolutley RIGHT! After watching that show, I’m ready to follow Volcker around and repeat his every word like Garret Morris’s SNL character would repeat Chevy Chase at the end of the news for the Hard of Hearing. “Ferdinand Franco is still DEAD! Our Banks are MONOPOLOIES! Even Brooksley swears this vile economic pumping and dumping is never gonna stop! Break them UP! BREAK them UP! BREAK THEM UP!”
Looks like Obama’s going down like Wilson, and Volcker’s going down like Veblen. Our Congress and President need to come forward and admit the reason they aren’t doing anything is because this is a giant Jenga puzzle built of circus peanuts and just fixing it is going to blow us all to hell. Well, I knew it was coming, but I don’t care anymore, thank Wilco. LET HER BLOW!
Ah! Get back in your rooms Clinton, Lugar, Gramm, ALL of you miserable excuses for government. Sorry, Dealbook. I put this all together myself over the past year and have been trying to say it repeatedly only to discover I’M NOT CRAZY! Now, I know how Brooksley feels. Obama, give that woman your Nobel! Then crawl to Volcker and do what he says. He’s not some weak guy behind a curtain. He IS that flaming giant head, and you better do what he says!— Abby Tucson, AZ
6. October 21, 2009 9:12 am Link
Yes Yes Yes. The most sound reasoning I have heard. I am SICK AND TIRED OF WALL STREET PLAYING WITH MY MONEY , MAKING PROFIT ON MY MONEY THEN bankrupting the system and taking my house. WHy not separate commercial and investment banking? It should always have been this way . What happened to Brookesly Born. There was one of the only voices o f reason in the past decade. Speaking alone as usual. IN MY AMERICA NOW, MONEY TALKS LOUDER THAN PRINCIPLE OR THE GREATER GOOD FOR ALL. Frustrated American.— Judy Leonard
7. October 21, 2009 6:02 pm Link
What is truly depressing about what happened to Brookesly Born is that there was never a honest effort to discuss the issues by the Greenspan-Summers-Rueben group. They knew they were right and didn’t want to be confused by any other logic than their own.
Think a minute about the vaulted “magic” hand of the market. In a market the best wins because consumers choose the best. This implies an informed decision. When you are choosing to buy derivatives that by definition are opaque it is not possible to make an informed decision. It seems that at a minimum some standards need to be set for reporting if the market is to have a chance of working. That the Greenspan gang blocked all attempts at even the most reasonable requirements is an indictment of their judgement. That the current administration is depending on Lawrence Summers for guidance is troubling to say the least.
I do appreciate that Mr. Greenspan has at least partially admitted to errors in judgment. Unfortunately, Mr. Greenspan errors have hurt us all and the most vulnerable of us have been hurt the most.— Bill MacAllister
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