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Volcker Locks and Unloads on Wall Street and Washington

Posted by Larry Doyle on September 24, 2009 12:15 PM |

Former Fed Chair Paul Volcker

I find it interesting, but not surprising, that former Fed Chair Paul Volcker’s testimony to Congress this morning has received little to no coverage by major media outlets. Why? With few exceptions, the financial media plays along with the financial industry which pays the bills while relegating investors and the American public to the bleachers.

Recall that just a week ago I wrote “Volcker Launches Bombshell on Wall Street and Washington.” I highlighted Volcker’s direct hit:

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.

Today, Volcker locks and loads and unleashes another volley on the wizards in Washington and their incestuous brethren on Wall Street. Whatever you may think of Volcker as a central banker, I hold him in high regard for elevating the debate at this critical point in our country’s economic history. Regrettably, President Obama’s adviser, Mr. Larry Summers, has taken Mr. Volcker’s chair away from the table. Yes, this is the same Mr. Summers who The New York Times described this past April as having received A Rich Education . . .

Mr. Summers, the former Treasury secretary and Harvard president who is now the chief economic adviser to President Obama, earned nearly $5.2 million in just the last of his two years at one of the world’s largest funds, according to financial records released Friday by the White House.

Impressive as that might sound, it is all the more considering that Mr. Summers worked there just one day a week.

Although I digress from my focus on Mr. Volcker, I find it enlightening that the man in Washington who has pushed Volcker away from the table stuffed himself at the Wall Street trough. Back to Mr. Volcker.

Volcker reiterated his views today that the fundamental manner in which banks allocate capital must change in order to regain and then preserve future economic prosperity. He castigates those on Wall Street for having achieved ‘business as usual’ while he deferentially but clearly holds those in Washington in disdain for allowing it.

The San Francisco Chronicle (why couldn’t I find commentary by a major financial media outlet?) picks up an AP story of  Volcker’s assault and writes, Obama Plans Maintain ‘Too Big to Fail’:

A top White House economic adviser says the Obama administration’s proposed overhaul of financial rules preserves the policy of “too big to fail,” and could lead to future bailouts.

Volcker said he does not differ with the administration on most of its proposals, and takes “as a given” that banks will be bailed out in times of crisis.

But he said he opposed bailouts of insurance firms like American International Group Inc., automakers’ finance arms and others.

“The safety net has been extended outside the banking system,” Volcker said. “That’s what I want to change.” (LD’s highlight)

Volcker, 81, has emerged as one of the administration’s internal critics. He serves as head of President Barack Obama’s Economic Recovery Advisory Board, but has said the administration should take a slower, more methodical approach to overhauling the financial system.

For clarity purposes, what Volcker is driving toward is shutting down the internal ‘back room’ casinos, otherwise known as internal hedge funds, operating inside the large Wall Street banks. The capital allocated to those business units is capital that is not and will not flow through to Main Street. In short, Volcker supports backstopping commercial banking activities supporting our economy while not supporting the implicitly risky trading activities connected with banks’ proprietary business units.

Will the banking system survive without these units? Yes. Will they be as profitable? No. Will their stocks be repriced without these business units? Yes.

All this said, Wall Street lost trillions of dollars throughout this meltdown. A significant percentage of those losses has yet to be acknowledged. Our wizards in Washington believe that keeping the back room casino open allows the system to heal itself most quickly.

Do you think for a second that as it heals itself the crowd on Wall Street will be amenable to truly changing the rules? Does Wall Street work for Washington or does that relationship truly run the other way?

Volcker’s direct hit on this Washington-Wall Street charade is not only timely but critically important. Regrettably, his views will receive little attention and less chance of actually being enacted. They still deserve to be spread to the American public.

I salute him for the courage of his conviction.


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