Sense on Cents

Score major points for former Fed Chair Paul Volcker in his pursuit to restructure Wall Street. How so?

A letter in this morning’s Wall Street Journal from five former Treasury Secretaries endorses Volcker’s proposal to limit proprietary trading activities in our largest banks. The letter reads,

We who have served as secretary of the Treasury in both Republican and Democratic administrations write in support of the proposed legislation to prohibit certain proprietary activities of commercial banking organizations—the so-called Volcker rule, as part of needed financial reform (“It’s Time for Financial Reform Plan C,” by Alan Blinder, op-ed, Feb. 16).

The principle can be simply stated. Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services.

Hedge funds, private-equity funds, and trading for speculative gains are activities carried out by thousands of nonbanking firms. These firms and funds are and should also be free to compete and to innovate. They should, like other private businesses, also be free to fail without explicit or implicit taxpayer support. Those few nonbank firms that present systemic risk should be subject to reasonable restrictions on capital, leverage and liquidity.

We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform. It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities.

We urge the United States to take the lead in the forthcoming G-20 meeting and other appropriate forums to achieve broad agreement on this principle among the leading financial centers.

W. Michael Blumenthal

Nicholas Brady

Paul O’Neill

George Shultz

John Snow

These signers are not exactly lightweights and the fact that they have served during Democratic and Republican administrations adds to its heft.

What do Jamie Dimon and Lloyd Blankfein have to say about this? If this rule were to pass, it would be the end of both JP Morgan and Goldman Sachs as we know them. Goldman would likely quickly move to no longer be a bank. JP Morgan would likely have to shed some units and restrict other activities.

This could get very interesting.

LD

Related Sense on Cents Commentary

Proprietary Trading Did Bring Down Wall Street (February 3, 2010)

This entry was posted on Monday, February 22nd, 2010 at 3:59 PM and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.