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Volcker Rule Gains Support of Former Treasury Secretaries

Posted by Larry Doyle on February 22, 2010 3:59 PM |

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)

  • Mike

    Well I’ll say its one big step in the right direction.

  • Looks like the banks themselves will stay in the shadows as long as possible, and let their henchmen do the dirty work:
    http://www.market-melange.com/2010/02/22/reply-to-arthur-levitt-on-the-volcker-rule/
    Soros is a more interesting one. He is said to support the rule, and claims to believe in reflexivity, by which he means investors can influence outcomes by their investment decisions.
    Late 2009 he was buying banks, come Volker Rule, did he put his money where his mouth was by cutting positions? (Note JP Morgan estimated a 1/3 drop in ROE for prop-trading banks, should the VR get approved.)

  • coe

    One doesn’t have to look too hard to find dozens, no – make that hundreds of banks going about their business…taking in deposits and augmenting them with some wholesale borrowings – mostly collateralized, and then lending money in their local footprints…these banks are like metronomes in a storm, and their business plans are both traditional and simple…sure, the lending performance is subject to credit cycles…but, for the most part, as far as these institutions go, the banking system will not find itself at risk in terms of excess leverage, misuse of proprietary trading, capital strains, derivative volatility and the like versus the “too big to fail” crowd…I point this out to confirm that the banking model has worked and still works, and that the collective view of the seasoned and partisan Treasury Secretaries is worthy of merit…when you look at some of your recent posts, LD, and consider the fiscal travesty that we are facing as a nation – let’s rattle off the pension fund debacle, social security and other entitlement programs, the stimulus surge, the deficit, and the relentless assault on our senses with the health care discussions, can we really allow our protected banking system to absorb the inevitable hiccups…I say not if we can help it…and we can…let’s get back to basics and leave the bigger risks to the private sector where they belong!






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