The latest endorsers for the so-called Volcker Rule separating riskier trading activity form government insured depository banks have gone public. Five former U.S. Treasury secretaries have called upon Congress to implement rules limiting both the size and trading activity of these banks.

The Treasury secretaries are John Snow, Paul O’Neill, Nicholas Brady, George Shultz and W. Michael Blumenthal.

In a letter to the editor, published this morning in the WSJ, they wrote:

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

As we have noted in the past, this rule would not have prevented the current crisis; rather, it addresses new taxpayer risks created by the bailouts. Under the Volcker rule, the firms that engage in leveraged speculation should no longer expect Uncle Sam being there to backstop them.

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Source:
Congress Should Implement the Volcker Rule for Banks
WSJ, FEBRUARY 21, 2010
http://online.wsj.com/article/SB10001424052748703983004575074123680183534.html

Category: Bailouts, Regulation

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21 Responses to “More Endorsements for Volcker Rule”

  1. flipspiceland says:

    If Lord Blankfein, and the other “Coincidences of Interests” globally don’t want the faux Glass-Steagal act, then there won’t be one. There is no ‘crisis’ unless Goldman Sucks, Chase, and JpMorgan can engineer a way to make a trillion dollars on it BEFOREHAND.

    Yahweh himself could insist upon it and it won’t make one damned bit of difference.

    There won’t be any Volcker rule or any thing like it.

  2. torrie-amos says:

    reform seems to be in direct proportion to amount of money you spend on lobbyists, those guys=zero, likelyhood of success=neglible

  3. snapshot says:

    http://www.voxeu.org/index.php?q=node/4659

    “The doomsday cycle” @ VOX by Simon Johnson and Peter Boone is a pretty good read as well.

    “We believe that the best route to creatingh a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.”

  4. snapshot says:

    OOpps! “best route to creating….”

  5. davossherman@gmail.com says:

    Good read, good support for a good idea.

    But the lobbyist rule the Congressional whores who only know how to kneel and consume what their masters tell them to.

    Good eggs like O’Neill and Volcker are ignored. Morons like Geithner, Summers, Romer & Bernake create accidents the way their parents did.

  6. Moss says:

    Interesting that Rubin is not on the list. I still say that it will not be pushed by Summers or Geithner unless Rubin also joins in. Rubin pushing for it would be akin to the mea culpa that Greenspan gave to the Congress on his ideology being flawed.

  7. Marcus Aurelius says:

    . . . let’s close the barn doors, so the next cows we get won’t do the same things the last ones did.

    (Note: The last ones set fire to the barn, shit in the well, and took everybody hostage).

  8. cognos says:

    The problem with this idea is that its VAGUE.

    If you want Glass-Stegall back, just say so. Everyone knows what that means… and essentially it splits JP Morgan, Citigroup, Bank of America in 2. Forces Wells Fargo and Bank of NY to stop trading / risk taking. Forces some division selling and banking/lending limits at Ibanks. But say, “Goldman” … is LEAST affected by this. (Just as Bear / Lehman were really “post-Glass Stegall combos”… why do we care?)

    The idea that “Volcker knows ‘risk taking’ when he see it” is idiotic. The idea that one can separate “trading prop” and “trading for customers” is so naive. It does not understand the very basics of what / how stuff is traded in the institutional environment. Just consider a large block trade, say 5-days volume in a large cap stock. Do you want to bid? How much do you want to bid? (You’re going to end up with a 1-month “prop” exposure if you win this bid).

    Finally — How many US Treasury secretarys “did not” support this? (They clearly asked all of them). I can count 4 off the top of my head. So I bet there are 10 who didnt sign. Thank them. They are smarter.

  9. [...] More Endorsement For The Volcker Rule (TBP) [...]

  10. Assassin says:

    I can count 4 off the top of my head. So I bet there are 10 who didnt sign. Thank them. They are smarter.

    lol. Paulson and Rubin aren’t smarter than dog crap, let alone the 5 Secretaries who wrote this letter.

  11. The Window Washer says:

    I second Moss:

    cognos ,
    I’d say that at this point we’re really at the get the train moving stage, so vague is important. You have to get something through before elections or ready so that you make an Yes/No promise during the election.

    Bailout hate is off the chart. Without something everybody gets burned, bi-partisan bill by the fall.

  12. James A. Bianco says:

    What is more interesting is which Treasury Secretaries are not on this list …

    Tim Geithner
    Hank Paulson
    Larry Summers
    Bob Rubin
    James Baker

    Which group is considered more “heavyweight”? We would argue the latter, although George Shultz’s name on the first list carries a lot of weight.

  13. cognos says:

    Bianco — nailed it!

    When 2 of your 4 are John Snow and Paul O’Neill… its looking lightweight.

  14. Cherp says:

    It would be a beginning…

    we are doomed anyway !!!

  15. Moss says:

    Paulson would never endorse the Volker rule and quite frankly he has no credibility.
    Baker may but I don’t know what his existing ‘connections’ are.

    If Rubin did it would signal tacit approval from both Larry and Timmy.

  16. [...] Former Treasury secretaries back the Volcker rule.  (Reuters, The Reformed Broker, Big Picture) [...]

  17. Deferred Comp says:

    Prop trading is easy to distinguish from principal trading. It is not as complicated as some say it is.

  18. DeDude says:

    “What is more interesting is which Treasury Secretaries are not on this list”

    No the most interesting thing is the complete lack of arguments against it. I guess they are smart enough to know that “it’s cruel if we cannot rob and plunder anymore” just won’t cut it in todays debate.

  19. David Merkel says:

    I still think that the Volcker Rule is a less effective way of getting at the problem. Set the risk-based capital [RBC] level for equity-like risks to 100%. Equity must be funded with equity capital. Then adjust the remaining RBC rates to reflect long term loss rates plus a buffer.

    It works for the insurance industry.

  20. soloduff says:

    cognos is right (theVolcker rule is vague) and flipspiceland is right (it won’t get adopted anyway).

    Proof that the Volcker rule is vague enough to allow passage to the next financial crisis is right in front of us: The hallowed letter (above) refers to “legislation to prohibit certain proprietary activities of commercial banking organizations—the so-called Volcker rule.” –Please note that “certain proprietary activities” are without benefit of further specification. Likewise the letter refers to ” restriction of proprietary activity by banks”–not “elimination” or “prohibition.” Also, those of you who read Volcker’s own NY Times op-ed at the end of last month will perhaps recall that Volcker himself was vague as to any precise definition of proprietary trading.

    Finally, the above letter is equally vague on the purported size limits for big finance. The named op-ed by Volcker was likewise vague on this point; Volcker even said that we couldn’t go back to a small- bank regime as praised by Adam Smith.

    Moral of the story: One way or another, sooner or later, big capital gets its way.

  21. cognos says:

    soloduff — thanks. lucid thoughts.

    AT LEAST, those complaining should say something — specific. For example — “bring back Glass-Stegall”. I dont think that would matter (Bear, Lehman, AIG, FNM/FRE — all had nothing to do with the repeal of Glass-Stegal)… but I always thought the separation of investment and commerical banking was a good idea.

    And that seems to be exactly Volcker’s main point. So why doesnt he just say that? (Ans — because no one supports breaking up JPM, C, BAC, and the international large diversified banks.). So he says something populist like “let resistrict prop trading”… when it has little to do with anything that caused problems and even less to do with some that would create practical change. He just wants “limelight” back.

    Sad. And stupid.