MAY 1, 2010.
New Life for 'the Volcker Rule'
Senate Weighs Curbs on Bank Trading Sought by Former Federal Reserve Chief.
By BOB DAVIS
Former Federal Reserve Chairman Paul Volcker is 82 years old. He can't hear so well. And for a time he was outmaneuvered by President Barack Obama's economics team.
But as the Senate moves toward the biggest rewrite of financial rules since the 1930s, Mr. Volcker's ideas are having a profound impact on the debate.
Agence France-Presse/Getty Images Presidential candidate Barack Obama meeting Mr. Volcker in Florida in 2008.
The Senate is considering writing into law what Mr. Obama calls "the Volcker rule," which would effectively bar banks from the risky and often lucrative practice of trading for their own accounts. The Volcker rule is aimed at undoing a side-effect of the bailouts of 2008 and 2009: An assumption that government will always rescue big financial institutions, and thus make it easier for them to borrow heavily to make risky bets.
Mr. Volcker, now head of the president's economic recovery advisory board, proposes that the government's safety net be extended only to banks that stick to taking deposits and making loans, not to those that engage in proprietary trading for their own profit. Banks would be forced to give up such trading or surrender banking licenses. If they choose to retain proprietary trading, they would be allowed to fail.
"We'll give you a nice coffin and an easy cushion...but you're not going to be saved," Mr. Volcker said.
"We're talking about changing the rules governing global finance for the next 25 or 50 years," said Harvard University economist Kenneth Rogoff. "Thought leaders like Paul Volcker help shape the accepted wisdom."
On Jan. 21, Mr. Obama stood beside Mr. Volcker at a White House press conference and embraced the Volcker rule. The spirit, if not the letter, of Mr. Volcker's proposal is embodied in legislation pending in the Senate—and some senators are vowing to toughen the language before the bill is final, especially in the wake of civil securities-fraud charges against Goldman Sachs.
Associated Press Mr. Volcker in 1969 as undersecretary of the Treasury talking with President Nixon and another undersecretary.
Details are still in flux, but bankers are alarmed. J.P. Morgan Chase & Co. and Barclays PLC oppose the proposal. Industry lobbyists argue that it isn't essential and are seeking to consign it to legislative purgatory.
"Trading—proprietary or otherwise—didn't lead to the recent crisis," said Rob Nichols, president of the Financial Services Forum, an industry trade group. "Let's focus on correcting the major deficiencies in our current supervisory framework first."
At the outset, Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers weren't convinced the Volcker rule would prevent future economic crises. Proprietary trading didn't ignite or deepen the current crisis, they argued, and the Volcker rule wouldn't have prevented it. Instead, the initial Obama regulatory blueprint they backed emphasized stiffened oversight of financial institutions and new government authority to take over failing financial firms.
But while Mr. Volcker was relegated to overseeing a powerless advisory board, he has prominent allies, including Bank of England Governor Mervyn King and current and former Citigroup executives, some of whom have been pushing for his proposal.
Former Citigroup Chief Executive John Reed has said that combining investment and commercial banking was disastrous because investment bankers "overwhelmed the traditional culture" at the bank "and now Citi is in trouble." Current CEO Vikram Pandit recently wrote Mr. Obama: "I believe banks should be banks serving clients. I believe banks should not speculate with their capital."
The 6-foot-8 Mr. Volcker is stooped nowadays. He walks slowly. But that didn't stop him from staging an energetic lobbying campaign for his proposal beginning last spring. His influence is evident. Rep. Paul Kanjorski (D., Pa.) said a March 2009 dinner with Mr. Volcker shaped a proposal, for which Mr. Kanjorski won House backing, that would enable regulators to dissolve major financial institutions even if they aren't bankrupt.
Meanwhile, as polls showed that the public viewed Mr. Obama as too friendly to Wall Street, he invited Mr. Volcker to the Oval Office on Oct. 28 along with Vice President Joe Biden and Messrs. Geithner and Summers to discuss regulatory approaches.
Associated Press President Reagan with Fed Chairman Volcker in 1987.
Mr. Biden urged the president to back Mr. Volcker's provision, according to White House advisers, and objections from Messrs. Geithner and Summers faded.
The president assigned Mr. Geithner to craft a proposal based on Mr. Volcker's ideas. The two men met with Mr. Summers at the White House on Dec 23. Mr. Geithner continued the talks with Mr. Volcker at the Treasury the next day, and said he told Mr. Volcker he would recommend that the president endorse a ban on bank proprietary trading, which Mr. Obama did at the Jan. 21 press conference.
Although Treasury officials and Mr. Volcker emailed back and forth about a "fact sheet" to explain how a Volcker rule would work, the White House didn't distribute it. That handicapped Mr. Volcker's advocacy on the Hill and he couldn't clearly define the trading practices he wanted banned.
"It's like pornography. You know it when you see it," Mr. Volcker cracked at a February Senate hearing. "Well you might see it. But would the regulator see it?" responded Sen. Richard Shelby (R., Ala.).
Wall Street watched apprehensively. Some sought to keep the provision from moving forward. Bankers and some economists warned that drawing a line between trading on behalf of customers and trading for profit would prove difficult.
Then came the charges against Goldman Sachs, reigniting controversy over the social utility—and potential conflicts of interest—of banks trading for their own profit. At a hearing, Goldman's finance chief said implementing the Volcker rule would hurt U.S. competitiveness.
Senate Banking Committee Chairman Christopher Dodd, as part of a broader finance bill, is proposing to require a new council of regulators to study the issue for 60 days and then decide how to implement it.
But two Democrats, Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.), are seeking to amend the bill to toughen the language and force regulators' hand.
Another provision of the bill would go beyond what Mr. Volcker suggested and push banks out of the business of trading derivatives altogether.
The issues are likely to be resolved on the Senate floor in May, and the outcome is unpredictable.
Meanwhile, Mr. Volcker promises that he'll continue battling. "I am old. I might be old-fashioned, but I stick with it," he said.
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