Former Fed Chair Launches Bombshell on Wall Street and Washington

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.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

Visit: Sense On Cents

1 Comment on Former Fed Chair Launches Bombshell on Wall Street and Washington

Leave a Reply

Your email address will not be published.