“Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking.”
In his bluntest speech yet on reforming Wall Street former Federal Chair Paul Volcker called on banks to operate with “far less risk.” Banks need to stick to their knitting, taking in deposits and lending money to people who can afford to service that debt. Further, as federally insured institutions, they should not be “making trading bets with their own capital.” Instead, they should be trading on behalf of their clients, not their own prop desks.
You know, more like, well, banks — and less like Hedge Funds.
This is a welcome change from the milquetoast reform proposals coming out of the Obama White House.
The irony of this is that Volcker is chairman of the White House’s Economic Recovery Advisory Board. One unfortunately gets the sense his advice has been mostly ignored by the White House. Hence, his support of much stricter regulation than the proposals we have so far seen from the banker’s friendly defenders of the status quo, Tim Geithner and Larry Summers.
“The activities Mr. Volcker criticized have caused banks to incur major losses in recent years. Nonetheless, proprietary trading and related activities appear to be making a comeback as markets have thawed.Mr. Volcker said banks should be banned from “sponsoring and capitalizing” hedge funds and private-equity firms, which are largely unregulated. He also said “particularly strict supervision, with strong capital and collateral requirements, should be directed toward limiting proprietary securities and derivatives trading.”
The activities Mr. Volcker criticized have caused banks to incur major losses in recent years. Nonetheless, proprietary trading and related activities appear to be making a comeback as markets have thawed. He also said collateral and leverage restrictions against the largest nonbank financial institutions “may be needed.”
The comments reflect Mr. Volcker’s long-held view that banks should act more in line with their traditional role and not take extremely risky gambles, which could threaten the viability of commercial banks and expose the Federal Reserve and taxpayers to large risks. 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.”
Next week, Volcker will appear before Congress, where one hopes he will testify on their inexcusable acquiescence to bank lobbyists, and their inability to reform finance. “Grow a spine, you corrupt, chicken-shit cowards, before the country goes to Hell,” we wish he was overheard to remark.
Volcker Calls for Restricting Banks’ Risk, Trading Activity
DAMIAN PALETTA and JOHN R. EMSHWILLER
WSJ, SEPTEMBER 17, 2009