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Volcker Launches Bombshell on Wall Street and Washington

Posted by Larry Doyle on September 17, 2009 9:31 AM |

Former Fed Chair, Paul Volcker

While the insiders on Wall Street and Washington pander about real financial regulatory reform, former Fed chair Paul Volcker yesterday hit ground zero on this hotly debated topic.

The heart of financial regulatory reform is centered on the implementation of leverage by our largest financial institutions. The leverage is exercised in a wide array of activities, both on and off-balance sheet. The capital utilized by the banks in these activities is credit that has not and will not flow directly through to the economy. Why? The banks believe that they will generate a greater return on the capital via proprietary activities rather than facilitating client business and addressing customer needs.

These proprietary activities, housed in balance sheet trading books and also in off-balance sheet SIV’s (structured investment vehicles), provided many nails in our economic coffin. While the Fed has provided the liquidity to refloat the markets (and to a lesser extent the economy), Wall Street banks are fighting hard to maintain as much of their proprietary activities as possible. Washington is largely dancing around the edges of the banks’ balance sheets in proposing financial regulatory reform. Until now. Paul Volcker hits Wall Street hard in promoting the end of the banks’ hedge fund like activities. The Wall Street Journal details Volcker’s bombshell in writing, Volcker Calls for Restricting Banks’ Risk, Trading Activity:

Former Federal Reserve Chairman Paul Volcker on Wednesday said banks should operate in a much less risky fashion, including not making trading bets with their own capital, comments that could provoke intensified debates over the future of financial regulation.

Mr. Volcker, who currently is chairman of the White House’s Economic Recovery Advisory Board, suggested banks should be restricted to trading on their client’s behalf instead of making bets with their own money through internal units that often act like hedge funds.

“Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking,” he said in a speech to the Association for Corporate Growth in Los Angeles.

Mr. Volcker’s comments could put him at odds with the Obama administration’s proposal for new financial rules. The White House has called for more oversight of banks’ operations but doesn’t push such strict limits on what they do.

Believe me, the Wall Street lobby is working overtime to delay and dilute the impact of even the shallow regulatory reforms currently proposed by Washington. Volcker’s proposal would serve to dramatically change the very nature of how Wall Street operates. I welcome it on a number of fronts, as it would promote economic activity and financial intermediation, including:

1. prioritize extension of credit to Main Street

2. lessen systemic risk on Wall Street

3. dramatically lessen the incestuous nature of the Wall Street-Washington relationship

4. promote much greater transparency in our financial framework

5. level the playing field on our equity exchanges

6. diminish the propensity for insider trading activity on Wall Street

Mr. Volcker takes on the White House and Congress with his proposal. We know Volcker is no favorite of Larry Summers. Knowing the explosiveness of his proposal, Volcker is not bashful in addressing the discomfort his proposal would create for the Washington insiders who are in Wall Street’s pocket. The WSJ sheds further light on this point:

Asked after his speech if his comments represent a break with the White House’s proposal, he replied: “Nothing I said today should be a surprise” to the administration.

Mr. Volcker said he would appear before Congress next week to discuss his views in more detail. A Treasury Department spokesman declined to comment.

I look forward to Mr. Volcker’s testimony, and I will certainly not decline to comment.

LD

  • fiscalliberal

    Larry – Do you think your views are that of the worker bee’s of Wall Street or are you kind of a radical outside the box thinker.

  • Larry Doyle

    Fiscal…I would not define myself necessarily as either.

    There are a LOT of great people on Wall Street. That said, I was never overly impressed with the quality of character of many very senior managers. Perhaps it was simply a function that these individuals were required to be overly aggressive if not cutthroat in order to attain those positions. Additionally, they were often willing to forsake principle for profit.

    I wanted to generate as much profit as anybody, but I would never foresake my principles. I do not view that as a radical approach.

    I personally think one can generate plenty of profit while also promoting principle….regrettably for many people ‘plenty of profit’ is never enough. There always has to be more . . . even at the expense of principle.

    Some may view my thinking as outside the box but I would respond that I was merely playing the game in a different fashion.

    There are plenty of worker bees who were no better than the management.

    • minitrader808

      Larry,

      regrettably, this huge problem with our financial sector now bleeding to mainstreet and overwhelming global economics is directly related with wall street abandoning “principles.”

      i feel the atom bomb (OTC derivatives) still hasn’t gone off here yet. we still have to get rid of it, but how we do is entirely up to the administration. hopefully volcker’s views will be favored by the obama administration. if not, the bomb may go off and things will get pretty nasty.

      -minitrader808

      • Larry Doyle

        Minitrader808,

        Welcome to Sense on Cents. I do not disagree that there are some ticking time bombs within the system. How they are defused or detonated can be a challenge, but in that process are other bombs developing?

        I think Volcker’s voice gets little air time within the administration….regrettably.

  • Gary Bergerson

    If there are “a lot of great people on Wall Street” how come
    they all remained silent for 8 years about the 9-11 puts?

  • Larry Doyle

    Gary,

    What do you estimate the Wall Street population is? A few hundred thousand at least.

    Now what percentage of people do you think may have been aware of suspect trading activity prior to 9/11?

    I am NO apologist for any suspect, questionable, or illicit activities on Wall Street. Anybody reading my work knows that. By the same token, I am also NOT going to implicate an entire industry for the bad behaviors or shoddy management of others.

  • http://PublicCentralBank.com Kent

    More evidence for why we need a public central bank.
    private Fed and banks have no interest in the public, nor
    do they have any interest in the public good or the nation’s welfare.

    see PublicCentralBank.com

  • Jack

    END THE FEDERAL RESERVE.

  • Lois Nichols. Esq.

    Absolutely dissolve the Fed Reserve.

    This is a private entity that has been in our lives for over 100 years and NEVER should have been allowed to survive. It was/is a power monster in disguise as a “Federal” protector of our financial health.
    Phooey.

  • Sam Adams

    It’s the only way out, we must End the Fed, before it’s too late!

  • Tailgunner

    This whole End The Fed campaign is starting to worry me.

    If I were part of the rich and powerful globalist elites who control the money and it’s inflationary and deflationary status, and I wanted to destroy the dollar and the constitution of the United States, the most logical thing I would do is to End The Federal Reserve. Then it would be much easier to bring in a world currency.

    And the way I would do it?

    I would provocateur a campaign to expose the Fed (which I all but own) and then get the people angry enough at it to want to expose it and end it. So, the people would unwittingly do my dirty work for me!

    I would then use my United Nations powers to institute a global currency to replace the one the uninformed people got rid of for me.

    The moral of the story is this: You all better have a replacement currency system in place before “Ending The Fed”, or else you might just inadvertently “End The USA” on accident as a side effect of your unfocused patriotism.

    When Bloomberg and other “mainstream” conglomerate media corporations begin touting the necessity of exposing or ending the Fed, I know there is something more happening here.

    Example: When Rupert Murdoch of Fox fame came forward on international television and “admitted” that global warming was real and man-made… I finally knew for sure that it was not man made or real!!!

    Let’s think this through.

    -Clint-

    • Nick

      I absolutely agree with you!! You have to think outside the box on everything. This “END THE FED” campaign would not be gaining so much steam unless the controlled corporate media and globalists wanted it too

      So instead of just “END THE FED” How about “END THE FED and replace with a real Bank of America by the people and for the people”.

      Any kind of End the Fed legislation will have to include a replavement system that is positive for the American people!

      Nick

      • K Ackermann

        How do we know you are not trying to trick us into doing your dirty work?

        How do we know that you are not being tricked into tricking us?

    • Clampit

      So the FED is entirely in their control, and yet a scheme is devised to end it so a world currency can be inacted, which is also entirely in their control. Do you believe the End The FED campaigns advocate a global centralized bank issued fiat currency over a commodities backed currency? Of course the dolphins are all orchestrating this anyway…

    • seraol

      tailgunner you absolutely do not have a clue what you are talking about.

  • johnny Kunitake

    To Tail gunner:
    You have obviously not had the rug pulled out from you
    and lost millions of dollars when the fed, tinkered with the rates and dried up capitol.
    Its happened to me twice in my life about ten years apart
    once with greensin, and once with paulson….its only then do you start educating yourself with the theft the fed pulls off in enslaving the masses albeit voluntary.
    If you believe in being a slave, its up to you, for me
    I’s casting my vote by cutting them off at the hip pockets
    no more income tax for me, and 40 million other americans
    But listen if you believe being a slave to some
    rockafeller, rothchild types go for it. Me i have set myself free and consider myself a patriot to do it.
    If your paying income taxes they are using your money to take more of your freedoms away in socializing this countryu
    go figure, we do it to ourselves, because in fact those still paying BELIEVE IN SLAVERY either thru ignorance or thru fear.

    • StopNonsense

      You don’t pay income tax cause it goes to “socialist” programs that take away our freedom? Well, without a military (paid for by tax dollars), what kind of freedom do you think we would have? Without roads to drive on what kind of freedom would we have?

      • JamesKM

        Your logic is flawed bud. The roads are paid for by GAS TAXES if You haven’t noticed. As far as the military We could scale it down quite a bit and then make mandatory service. If people don’t want to serve then they pay a tax. We have over 289 million guns in this country and I for one would have no problems with serving in a militia if I didn’t have to pay for the elites war machine for profit…

  • johnny Kunitake

    we are responsible, we create our own reality, thru our thoughts and beliefs, both individually, and collectivly en mass. more and more are awakening to the fact that their is no one to blame but ourselves.
    The healing of this great country depends on our accepting responsibility for where and how we spend OUR MONEY. If you dont believe in wars killing innocent people, feeding the war machine, feeding this crisis or that. then stop giving them the money to do it CASt YOUR BIGGEST VOTE ever.
    ONly sound money gold and silver will keep your enslavers honest, start samll try using it with local people, silver coin any where u can, use it as an educational forum on why the founders put Artical 1 Section 8 in the constitution. Read the debates the fouders had before adopting art 1 sec8 in the federalist papaers. They were well aware in 5000 years of mans history every paper currency failed, simple reason (greed) THE ONES PRINTING PAPER COULD NOT RESIST THE TEMPTATION TO PRINT AND PRINT UNTIL THERE WERE QUINTILLION VALUE NOTES WHICH WOULDN’T BUY A LOAF OF BREAD.
    If you are fearful of consequenses of not going along with the existing status que, well then pehaps you are letting fear be your GOD. they cannot lock up an entire population can they now? And if they do well its 3 squares a day and a roof over your head without the toil your used to now. Infact your lot is improved by standing up for freedom.
    In fact only those who have written books on the subject have served time on these issues, political targets, to be made an example of by the hynotizing media that insures your fears are kept alive, arrested jailed for what? writing a book, Freedom of speach anyone?
    And these few great americans, compared to the millions they liberated and are now activly not filing income tax, was a small price on the mandella scale of price paid for freedom gained. Wake up cut them off at the hip pockets cast your vote today, dont wait until the next sabataged election. SO make a decision, you either believe in freedom or you believe in slavery, there is no middle ground to what the founders saw studied, and discovered, fought and died for.
    however you are free to chooseits your own mind after all

  • Pingback: Links 9/20/09 « naked capitalism

  • letitride2

    thus Deflation and without immediate implementation of the Man with the Cigar’s suggestions the Depression lasts longer and hits deeper.

  • Monty Pelerin

    Here is a post I put up in response to your article.

    Has Volker Said CEASE AND DESIST?

    Paul Volker dropped a bombshell on Friday that may indicate a serious rift between him and the Administration? He came out with a contradictory position to that favored by the Administration regarding regulatory reform that may present a serious problem.

    Recall, Volker and Warren Buffet were early supporters of Obama. They were both in evidence and referred to as Obama’s economic advisors. After the election Volker was appointed to a titular position as Chairman of a committe with no power and seemingly no purpose (they may have only met once or twice since the election). Whether Volker and Buffet still support Obama is unknown, but both seem to have distanced themselves. Buffet probably by choice, Volker in an embarrassing abandonment.

    Volker is one of the few on Wall Street who combine brains, gravitas, integrity and courage. The madness that has passed for economic policy cannot make him happy. To be proud and shunned is not a good combination. Nor is being hustled to and end up as little more than a stage prop in the campaign. He has nothing to risk by standing up and calling the so-called economic policies and regulatory reform a sham. Hopefully he is the first with many others to follow his lead.

    An excerpt from a post by Larry Doyle provides some details. The entire post can be read here and contains links to the WSJ article.

    Mr. Volcker takes on the White House and Congress with his proposal. We know Volcker is no favorite of Larry Summers. Knowing the explosiveness of his proposal, Volcker is not bashful in addressing the discomfort his proposal would create for the Washington insiders who are in Wall Street’s pocket. The WSJ sheds further light on this point:

    Asked after his speech if his comments represent a break with the White House’s proposal, he replied: “Nothing I said today should be a surprise” to the administration.

    Mr. Volcker said he would appear before Congress next week to discuss his views in more detail. A Treasury Department spokesman declined to comment.

    September 20th, 2009 | Category: banks, moral hazard | Leave a comment | Edit this post

  • http://freerepublic.com johnny kunitaki

    To Stop the Nonsense:
    Do your homework and research what portion of the income tax is used to pay interest on the fiat currency.
    Regarding the military who are they really defending? Not your liberties?
    Now we have enemy number one, a constitutionally illegle userper,socializizing america, in the white house now, with all the millions spent to defend the country and what ddid it buy you. We have crisis after crisis created to keep the war machine making billions for the war mongers all in the name of “Defending American Ideals” you’ve been watching too much sppon fed media my friend, your hypnotized to believe the story line.
    But if want to still pay, your income taxes go right on ahead it is voluntary you know.

  • Praedor

    The fact is that EVERYONE on Wall Street needs to be given a choice: actually do productive work or swing from a rope the way all crooks used to swing.

    ALL Wall Streeters are leeches. They produce nothing and expect to get paid for doing nothing. Either produce something tangible and useful and socially beneficial to the society as a whole or swing.

  • Larry Doyle

    Praedor…..let me tell you, that you are 1000% wrong in stating that ALL Wall Streeters are leeches.

    There are an overwhelming number of people who provide real financial services, make capital commitments that help businesses and the economy, and fulfill their roles and responsibilities with integrity.

    The bad apples and bad practices need to be exposed. To paint everybody and the entire industry with one broad brush is ridiculous, counterproductive, and actually indicates a lack of understanding as to how the industry works.






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