Volcker on Big Banks: 'Structural Changes' Needed

Paul VolckerClearly making his mark as the chief proponent of separating big banks from their lucrative-but-riskier speculative investment operations, former Federal Reserve chairman Paul Volcker said “structural changes” are needed to avoid repeating history with another crippling financial crisis.
In an opinion piece – “How to Reform Our Financial System” – published today on the New York Times website, Volcker gave his rationale for supporting capital markets trading restrictions on the biggest commercial banks where a significant portion of Americans keep their money.
As chairman of President Obama’s Economic Recovery Advisory Board, Volcker is now squarely at the center of the controversial proposal, reminiscent to many of the Banking “Glass-Steagall” Act of 1933 – that required banks to spin off their brokerage and investment divisions. In 1999, the Glass-Steagall investment-arena restriction on banks was revoked, opening up the market among banking, securities and insurance companies.
Of the Obama Administration’s different proposed actions aimed at big banks, the Volcker Rule could go further than any other in reshaping the U.S. financial landscape. Volcker and Obama say that proprietary trading by banks fueled the financial crisis and its bailout-driven response.
The Volcker Rule’s impact would be sharply felt by the most familiar banks to Americans.
JPMorgan Chase, for example, is the second-largest bank by assets and the top credit card issuer. Chase reported net income of $3.3 billion for the fourth quarter and $11.7 billion for 2009, or more than double what it made in 2008. The bank said profit was driven by its investment banking and private equity divisions.
“There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption,” Volcker wrote in the Times. “In such cases, authority by a relevant supervisory agency to limit their capital and leverage would be important, as the president has proposed.”
Volcker’s strongest contention is the “virtually insolvable conflicts of interest” that these financial institutions form with customers that cannot be fixed by the “so-called Chinese walls between different divisions of an institution.”
“The further point is that the three activities at issue — which in themselves are legitimate and useful parts of our capital markets — are in no way dependent on commercial banks’ ownership,” Volcker said.
Volcker spoke of those in the banking community and politicians strongly opposed to more regulations and complacent with the current regulatory structure.
“I am well aware that there are interested parties that long to return to ‘business as usual,’ even while retaining the comfort of remaining within the confines of the official safety net,” Volcker wrote. 
But he added that there is no substitute for structural change.
“The implication is clear. We need to face up to needed structural changes, and place them into law,” Volcker wrote. “To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.”

One thought on “Volcker on Big Banks: 'Structural Changes' Needed

  • January 31, 2010 at 11:10 pm

    WE MUST STOP the Banks and the Government from playing games with our money. Banks are hiding amendments from us, the consumers (people, CPA’s and even Lawyers do not understand all those amendments). It is even worse not having the time to read these bank amendments and terms because consumers are so tired when they get home from working 10 to 14 plus hours a day just trying to pay interest to Credit Card Companies, the Banks and Taxes to the Government. We live worse than the SLAVES because Banks charge 400 to 600 plus percent interest in loans a month. Look carefully at your Bank Interest. Let’s get back to a cash society. By the way, what happened with all the Gold reserves? Where is the Gold from Fort Knox or wherever it is stored?
    The Banks and Government are destroying and rubbishing our country and our constitution. We paid over 250 different taxes plus per month. ARE WE REALLY FREE or ENDENTURE perpetual Slaves!!!!!

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