“If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it — not save it. It’s called euthanasia, not a rescue.”

-Paul Volcker said on CNN.


Paul Volcker said in an interview with Fareed Zakaria that large financial institutions that engage in speculative activities for profit should be allowed to fail.

Volcker continues to argue for reinstating Glass Steagall — separating investment firms engaged in market speculation from commercial, deposit-taking banks.


Volcker says must let big financial firms fail
Reuters, Feb 14, 2010 10:52am

Category: Bailouts, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “Volcker: Let Big Financial Firms Fail”

  1. flipspiceland says:

    There is a Grand Canyon between so much of what we must do and what is being done (or not), in practically everything from public schools to global finance, from diet to dying well.

    There is likely no original thought anywhere about what MUST be done. Like a full set of screw extractors you can buy at Home Depot, they are all there for the taking.

    But what must be done does not coincide with the “coincidence of interests” (otherwise known as conspiracy, yes Viriginia, it is a blatant inyour face conspiracy) that run the world.

    As an early addition to “What are you Reading?” I recommend, “The Shadow Elite” , to get a handle on why what MUST be done will rarely, if ever, be what gets done.

    The solutions to our problems are all available at a moments notice; getting the hidden powers that be to implement them to their own detriment, to get them to be accountable, to take back the VOTE from those who have successfully hijacked it for the benefit of a very few whose only interests are themselves and the hell with the rest of the world is pissing into the wind.

  2. torrie-amos says:

    saw it, it’s obvious why he was on Fareed, he’s not talking nice anymore, oh, he was pleasant, yet, the real take away is he thinks gubments f’up severely

  3. Patrick Neid says:

    “Paul Volcker said in an interview with Fareed Zakaria that large financial institutions that engage in speculative activities for profit should be allowed to fail.”

    Like, DUH!

    Sadly no chance of ever happening while politicians/interventionists/Keynesians rule roost.

  4. Taliesyn says:

    Well now that we all hope that it’s been established *Once and for All* that Wall St. can *not* be trusted to “police itself” I find Volker’s advocacy rather encouraging while the old master still has breath to draw.

    I’d take Volker over Greenspin any day of the week and thrice on Shrove Tuesday.

    Makes Sachsman Paulson , then N.Y.Bank Fed chair Geithner , and Bernanke look like shills the are for the usual suspects.

    Reminds me of the political cartoon Ritholtz published some time back.

    ” Socialism for the Rich, Capitalism for everyone else.”

    I have it in mind ot publish as a T-shirt just to wear it to the usual Northen Virginia outdoor microbrew waterhole I frequent where there be the most concentration of *free market & supply-sider* assholes and just wait for that first comment after I’ve had my 2nd microbrew Stout.


    BR: Its a John Sherffius cartoon, and I used it as a Section intro in Bailout Nation

  5. The Curmudgeon says:

    There is a fantastically easy line between commercial and investment banks and has been all along: The depositors of a commercial bank are insured by the Feds (and don’t squawk any bullshit about there being any substantive difference between the FDIC and the Feds). If your depositors are insured against your misbehavior, then the insurance company they hired (i.e., the Feds, in the form of the FDIC) can tell you whatever it wants and you have to do it. If, on the other hand, all your play money comes from private, uninsured sources, such as is the case with most investment banks, then you can do whatever the hell you wish with your money, but don’t come crawling to your Uncle when it turns out that you’re no better at risk management than were the cavemen.

    Commercial banks are the part of the banking system that are systemically important. Day-to-day life would be very difficult without them and the trillions of transactions they facilitate. Investment banks are just gambling houses for speculatin’. We have only about 3/5ths as many as we did before the financial crisis. Except for the Greenwhich mansion market, what harm did losing them cause?

  6. [...] Volcker: Let big financial firms fail – Big Picture [...]

  7. globaleyes says:

    Too Big To Fail (TBTF) should be replaced by Too Insolvent to Save …..( TITS)

  8. cognos says:

    Like… DUH!

    Didnt we do this? Bear Stearns, AIG, Fannie, Freddie, WaMu, Wachovia — ALL FAILED!? (Just ask their stock holders). The whole issue is that Lehman failed in an un-controlled disorganized way. That was bad. Should not have happened.

    Its sad to see how silly and narrow-minded Volker has become. He has lost it. He is too old. I mean, consider that he hasnt really made any contributions to the game since 1985… and all of a sudden, he’s what we’ve been missing? I dont think so.

    The problem IS… what do we do when it looks like every bank has failed? (That is what a crisis is… oh, and then the m-t-m prices bounce 50-100% in 1-yr. What about that? What a moron.)

  9. The Curmudgeon says:

    Yes, Volcker is utterly silly and narrow-minded. He just doesn’t get that serious, expansive-minded people like Greenspan and Bernanke are better than him because they are able to leverage their youthful zeal for fantasy to create illusions of prosperity through tinkering with the price, and thereby supply, of money. Nevermind the crisis such thinking created. This is a new age. It’s not the essence of hubris to think that this time things are different. That in this age, old rules of human behavior don’t apply. That this age has nothing to learn from its elders. Yes, let’s shunt this old man aside so that we can enter this Brave New World where illusions matter more than reality.

  10. jzw says:

    The solution (as I think BR has mentioned) is for ownership of the failed business to be transfered to the FDIC. The shareholders are wiped out. Bond holders get a hair cut and shares in the new business. Govt injects capital and gets shares. When every bank has failed the Govt gets ownership of all banks. It is not that complicated. What’s missing is a process prior to full scale bankruptucy which forces a write down of the unsecured debt which buys you some time.

  11. Taliesyn says:

    hey Globaleyes, *L0ve* the *Too Insolvent To Save*.
    Give some relevant gravitas to the Brit slang phrase for something DOA as ” gone tits up “.

  12. Patrick Neid says:

    “Didnt we do this? Bear Stearns, AIG, Fannie, Freddie, WaMu, Wachovia — ALL FAILED!? ”

    I don’t think so.

    We let the namesakes fail along with the shareholders but none of the connective tissues where the real failures should have been. Under the pretense that said failures would end society as we know it, we pumped billions, no trillions into covering the derivatives, bonds, salaries, loans and the spawned offspring of these headliners. Fannie and Freddie? They are still here bigger than ever.

    All counter parties to all the failures you listed should have lost everything. If you make a bad trade you take your loss just like I do everyday in the market. No if’s and’s or but’s. Goldman and most every brokerage firm and bank should not exist today in their current form. If we had this hard reality we would not engender the bubbles that we labor under. There is no, has not been, any real risk in the market since the Greenspan put was birthed on Oct 20, 1987 at approximately 7:30am PST.

  13. Marcus Aurelius says:

    cognos Says:

    Like… DUH!

    “The whole issue is that Lehman failed in an un-controlled disorganized way.”

    This seems to be a call for regulation. I like that.

    Catastrophic failure is always, by nature, disorganized. The whole issue is that Lehman failed at all.

    And, yes, Volker has been sidelined since 1985 — just about the time all of the poison, criminality, and uber-liberal ideology allowed the banking/political classes to loot our Treasury (actually, Reagan needed Volker out of the way so that he could institute “trickle-down” policies). “Deficits don’t matter.”

    Heh. Turns out they do matter.

    If Volker’s strict conservative governance had been allowed to continue, there wouldn’t have been ANY bank failures in the first place.

    cognos: You need to take your schtick to some blog where people welcome poorly thought-out ideas that support their flawed views of the world. TBP commenters are too smart to fall for lines of bullshit such as yours.

  14. jritzema says:

    This magically resolution authority that he promotes exists already. It is called bankruptcy. Equity gets nothing, creditors then own it.

  15. cognos says:

    Crumudgeon, et. al — You guy really think the system has been broken since 1987? You really think those 22 years did not create wealth? All the condos, steaks, medicine, technology, and private jets are just an illusion?

    Those 22 years have been the greatest period of wealth creation for me, my family, and everyone I know. On a 22-year timeframe the 2008 crisis is a -10% blip. I think you could make this argument for the entire globe. That these 22-years have been BETTER than almost any other.

    Do you notice we are already firmly in recovery? The last year was better (more upside) than 2008 was bad. Many businesses are posting their best Qs ever and starting to hire again.

    Why all the pessimism?

    You guys been pessimists since 1985? (give it up, optimism is more fun and MUCH more profitable)

  16. [...] The Big Picture: Volcker: Let big financial firms fail [...]

  17. Marcus Aurelius says:


    You confuse wealth with debt. If we had generated any “wealth” whatsoever during the period you mention, we would not be burdened by crushing debt (private and public). You don’t understand where we are or how we got here, do you?

  18. MA,

    w/this: “cognos:

    You confuse wealth with debt. If we had generated any “wealth” whatsoever during the period you mention, we would not be burdened by crushing debt (private and public). You don’t understand where we are or how we got here, do you?”

    No, of course he doesn’t.

    In this context: “”Why not come and chat with me,” said the Grasshopper, “instead of toiling and moiling in that way?”

    “I am helping to lay up food for the winter,” said the Ant, “and recommend you to do the same.”

    “Why bother about winter?” said the Grasshopper; we have got plenty of food at present.” ”

    Dude is the Green one..

  19. cognos says:

    Mark Hoffer —

    But I have plenty of food, clothing, shelter? In fact I spend very little of my $ on these basics.

    How does the ant store healthcare? Does he make doctors and put them away in his little cupboard?

    How does the ant store up vacations? Or education? Or technology? (These are my large expenditures).

    So… he stored up all this food, gold, money… only to then want healthcare or education. And then 20-yrs later he found the world had plenty of food, gold, money. While everyone else had built business and technology. Everyone had invested and had 10x or 20x the money he had… despite all his hard work.

    Then he started saying… “all your money is an illusion”. “You dont have wealth, you have debt”. “One day my spam and my gold and my shotguns will be worth more than your silly ‘Google’”

    Sound right?

  20. cognos,

    being serious, are you?

    are you taking the, described, actions of the Ant, literally?

    and, why, then, are you dismissing/overlooking the actions of the Grasshopper?
    and, w/this: “Everyone had invested and had 10x or 20x the money he had… despite all his hard work.”

    tell us, exactly, where, now, is this the case?

    and, if you would, respond to this: “If we had generated any “wealth” whatsoever during the period you mention, we would not be burdened by crushing debt (private and public).” from, MA, above..

  21. cognos says:

    MEH –

    Savings and debt balance, right? The only way to earn “interest” on money is to lend it to someone… yes?

    So there can be local imbalances (too much in housing / China v. US / too much in tech stocks) but the accounts balance. Each $1 of debt… is $1 of someone else’s savings.


  22. cognos says:

    You see my point?

    1) The Ant cannot store healthcare (or ANY other high-value service).
    2) Thus he can only store “money”… but money is only valuable when invested (i.e. DEBT or equity).
    3) Saying… “there is too much debt” is simply stupid.

  23. mysterious eggs says:

    @cognos “All the condos, steaks, medicine, technology, and private jets are just an illusion?”

    Condos? some condos are valuable, but most are substandard construction/materials. The US just went through the forced building phase like the UK did in the 60s. They have disasters of council flats and master planned depression inducing lower middle class neighborhoods. It has left many with a home too dilapidated to repair and it’s too expensive to build new. I lived there for 13 years, I love the place, but there are some severe problems that (forced) overbuilding caused on society. When large swaths of these “20 year homes” and paper box CRE starts falling apart. There will be a HUGE cost to pay for society. Welcome to slumland, basically a trailer park on steroids. Instead of being out in the country where it doesn’t effect you, it’s on the interstate you have to take. Be careful when you stop for gas.

    Steaks? Have you paid attention to the quality of food? Most people eat “food products” now, not real food. Food Inc (2008) http://www.imdb.com/title/tt1286537/ is a great movie for people who don’t like to read/research. You are what you eat – whey protein, corn-everything, sugar substitutes and cheese product do not make a healthy population. But if you want, you can also get boutique food that is better than I ever remember.

    Medicine? Boner pills and medicine for “conditions” depression and anxiety show perhaps that we’re trying to cover up the root problem of our conditions. Perhaps older men could still get it up if they didn’t have unnecessary cholesterol/anxiety/swollen prostate/depression meds flowing through their blood. Which takes us back to “steaks”. If you eat right then you don’t get all these conditions from self -poisoning (read “modern medicine”). That said, there have been massive improvements in physiotherapy, joint replacements, post-surgery recovery times and stem-cell research.

    Technology? Yea, we did improve. That is essentially where all the innovation came from. Both farming and medicine took huge gains from the knock on effect of technology.

    Private jets? The gold platted buggies of the Russian Czars were a sign of progress?

    So when we look at your analysis, because 1% of the population has access to opulent condos, gourmet food like never before, legalized drugs that are as deleterious as crack and meth which they can gulp down while flying on their private jets we should celebrate? Well we DID give the other 99% chatrooms, twitter and myspace. What a deal.

  24. GrafSchweik says:

    Cognos @ 10:02am

    Your Panglossian view of American life over those 22 years–that this was and is the best of all possible worlds–is breathtaking–but only because you ascribe to the body politic wealth creation that has accrued only to the top 20-30%. Since Carter’s last year in office wages for the rest of us when adjusted for inflation have remained stagnant.

    In what passes for the Middle Class it takes two wage earners to maintain, if that is the word, something approaching the living standard of my parents’ generation that required only one income. Yes, there are more color tvs and there are computers, but the costs of housing, medical care, higher education, to name just three, swallow far higher percentages of income than in my father’s day. And as for retirement, don’t make me laugh.

    What percentage of American business/corporate profit accrued to the finance sector a generation ago? 7%, 8%? I don’t have exact figures to hand, but certainly no more than 10%. Where were they 2 years ago? 38% wasn’t it? Finance and the Neo-Liberal ideology have ruled the roost since Reagan with the result that industry and manufacturing have been largely off-shored. Consolidation has taken place across most if not all sectors with losses in competition and innovation in areas other than electronics and software. Unlike most of the countries in Old Europe (I do not include the UK & Ireland) we no longer have anything approaching an integrated economy and rely on supply chains as long as 10K miles for manufactured goods and as much as 3K miles for domestically produced foodstuffs. In even the medium term, let alone the long term, that is likely to be unsustainable as peak oil looms on the horizon along with climate change.

    The American middle class–even in the finance sector where I worked as a drone/foot soldier for a dozen years–not only has had to deal and continues to deal with the cheap labor caused by a flood of immigration from Mexico and beyond but with the much cheaper labor on the Subcontinent and in the Far East. Job security is now the stuff of fairy tales. My former employer, one of the largest non-Chinese banks on earth makes no bones about playing off their employees in one country against those in another and does so with the same alacrity with which they bugger their non super rich customers. That former employer deserves its poor service ranking.

    Yes, Cognos, I never had it so good. Life is just wonderful when keeping your job is akin to playing musical chairs and you have to be a corporate version of a “good German” just to stay in the game. We have as a nation never had it so good as social mobility ceased and went retrograde all within the course of a single generation.

    Within your bubble of expertise and field of action it has been a great ride, and your skill is apparent, but outside that bubble nowhere near as many people go to go along on it as you think. You are in dire need of a remedial course in Western Civ and a seminar in European Social & Economic History 1400-1990.

    You and the people like you–gamers and savants of an unsustainable economic order, and the matrix of oligarchies you serve that control most of our government, mass media and economy,–remind me of the Bourbons and the Romanovs. They had good rides too, ones that lasted centuries–until Reality caught up with them with guillotines and machine guns. I humbly suggest you go back and rethink Volcker: believe it or not, as Roosevelt did for your parents and grandparents in 30s, he’s trying to save your ass and those of your children from suffering the same fate they did.


  25. The Curmudgeon says:

    No, each dollar of debt is most definitely not represented by an equal dollar of savings. Ever heard of leverage? 50:1 or so, that LTCM had? Which about marks the day when wealth creation was forsaken for illusion.

    I get that American world hegemony that came with victory in the Cold War made for wealth amongst the developed, Western world beyond historical pale.

    But here’s the nub: All that wealth creation ended along about the late nineties, like I say, w/ LTCM the harbinger of what was to come. Ever since, it’s been about running in place, piling on debt, and monetary smoke and mirrors to create the illusion of wealth.

    The point of the grasshopper and the ant is that we are not preparing for the future–that winter for American hegemony is coming in the form a rising China, et al., yet we squander our resources trying to create an economic summer when the season has past.

    Sanguinity about the future is admirable, except when it’s foolish. Any objective view of Western civilization would have to conclude that its best days are past, if only because it is growing old and dying, and demography is destiny. There is never a straight line in nature, but the trend, in the absolute and as a relative matter, is that Japan, Western Europe and the US have peaked and are beginning the slide down.

  26. cognos says:

    Crumudgeon… but all that leverage is someone else’s savings.

    Yes… banks are 50:1 leverage on equity. But that leverage is FUNDED by borrowing money. The largest banks borrow money in the form of deposits (demand checking mostly, but also savings and CDs). Other banks borrow from money center banks in the inter-bank market. But all this money is someone else’s on loan. The banking system creates money through credit and “fractional reserve” but this ALWAYS creates both cash deposit (savings) and loan asset (debt). Accounts always balance.

    Crumugeon… werent we supposed to be afraid of Japan in the 1980s. Hegemonic decline was happening then too, right? The story is eventually true… but it may likely play out over 100s or even 1000s of years.

  27. cognos says:

    GrafShweik — I agree with the problems you state 100%. I have said it before on posts, the problems are really simple:

    - Lack of national healthcare is DEATH for the middle-class american worker. These workers compete with countries that have socialized medicine. Its impossible to compete when companies in the US must pay healthcare. Of course, the unions have worsened this problem by making pension and HC 30-50% of compensation… which is grossly illogical.

    - Further dis-enfranchising the middle class are the large tax preferences that have accrued to the top income earners. Why is “capital gain tax” 15%? And working taxes are 30-50%? I would think we would PREFER working income to capital income. Further… why is the FICA tax 12.4% on all income CAPPED at $100k. So for a 50-75-100k worker this is a 12.4% tax rate… but for the $1M/yr lawyer or banker this is 1.2%… and 11% REGRESSIVE tax differential. This should be immediately changed to 3% employee + 3% employer match on ALL INCOME. This would be a massive tax break to the largest employers (Walmart, GM, etc) and a large tax increase to the highest payers (Goldman, hedge funds).

    There are some simple, interesting way to IMPROVE the system. But saying… “its all broken” is de-focused, its unhelpful, and its non-sense.

  28. cognos,

    you state: “…but all that leverage is someone else’s savings.

    Yes… banks are 50:1 leverage on equity. But that leverage is FUNDED by borrowing money…”
    if that were True, what, pray tell, is “Quantative Easing” all about?
    also, the above, to your Q: Savings and debt balance, right?..
    but, more largely, you want to take the Ant’s actions, literally, and deride him for ‘hoarding’..

    it is simple-minded, no one is arguing that “Stocks”, in the “Stocks and Flows”-context, are the ‘only’ way to ‘save’/invest..

    and, others, above, expound, well, on other dimensions of your myopia..

  29. The Curmudgeon says:


    A point upon which I think we can agree: If nothing is done, health care costs will ultimately destroy us. There is no way we can continue along the path we are going. Decisions, hard decisions, will have to be made about health care expenditures. e.g., Is it the obligation of the state to pay hundreds of thousands of dollars for a hip-replacement for every grandma with osteoporosis? Should we spend millions upon millions trying to save every severely premature baby? These are real questions that will some day require hard answers. Just because we have the ability to extend life through medical procedures, should we always try to do so?

    The down side of having created so much wealth for so many is that we’ve grown to believe that we can always have it all, and that we needn’t decide, particularly on health issues, when enough is enough. If we don’t somehow learn to decide, we will one day be forced to.

  30. cognos says:

    MEH –

    Dont your points about leverage and “too much debt” preceed Quantitative Easing? QE has only been around for 1-2 years. Yet, you think there is “too much debt” since the 80s.

    Please make sense. Its hard to dialogue with non-sense.

  31. DeDude says:

    “What percentage of American business/corporate profit accrued to the finance sector a generation ago? 7%, 8%? I don’t have exact figures to hand, but certainly no more than 10%. Where were they 2 years ago? 38% wasn’t it?”

    Yes instead of having people spend their working hours on producing something useful, we have them spend all their times trying to make and execute financial “services” that basically just come down to finding legal ways of robbing other people of their wealth. The losers in that game off course are those few remaining individuals that produce something for a living. The American empire is about to keel over and it couldn’t have happened to a more deserving group of people. Spoiled little brads with no second thoughts as they $uck the lifeblood out of others.

  32. tawm says:

    Why does Paul bother? Like a useless idiot, he was trotted out by this administration for window dressing, but his opinions never mattered to those in power.

  33. cognos,

    as you so, summarily, prove, some things are, truly, ‘Fool’s Errands’..

    though, in effort to respond to your 13:42 post..

    try re-reading this: “you state: “…but all that leverage is someone else’s savings.

    Yes… banks are 50:1 leverage on equity. But that leverage is FUNDED by borrowing money…”
    if that were True, what, pray tell, is “Quantative Easing” all about?”

    I, merely, mentioned QE in response to your supposition(s), and, further, to be clear, while I agree that there is “too much Debt”, I hadn’t mentioned it..
    past that, yours@12:40, I agree that, as you start w/, many of the foundational ‘Rules’, currently in place, need to be re-examined, understood, and, quite likely, re-written..

    w/o which, tinkering with ‘Rates’ will not solve the, underlying, Insolvency..

  34. vachon says:

    Paulson broached the topic of orderly liquidations of formerly TBTF institutions and it finally appears to be gaining traction. I’d be very interested in seeing some working papers on actual implementation.

  35. vachon,

    try: http://scholar.google.com/scholar?q=Breaking+up+the+TBTF&hl=en&as_sdt=800000000001&as_sdtp=on

    for starters..

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    Share Print CommentsNow it gets interesting. With the recovery at least beginning, European and now British regulators are clearly leaning toward a more competitive banking system with smaller players. The European Commission’s Neelie Kroes’ decision to break up ING Group NV (NYSE:ING) was the first major substantive move, but that was followed by the announcement that two of the largest recipients of U.K. bailout money (which was just hiked), Royal Bank of Scotland (NYSE:RBS) and Lloyds Bank ( NYSE:LYG), would make divestitures in response to EU pressure and that the government wants at least three new banks cobbled together from remnants of RBS, Lloyds and Northern Rock plc. All this puts comments by Bank of England chief Mervyn King about the need to break up too-big-to-fail banks and move toward some version of venerable Glass-Steagall and by Adair Turner, the U.K. head of the Financial Services Authority, on Tobin taxes in a whole new light.

    As Simon Johnson says, there’s an increasing establishment consensus in Europe and Britain that breaking up TBTF banks, with implicit or explicit backing by the government, into a more competitive banking sector makes sense. Johnson concludes: “The U.S. position on protecting everything about our largest banks is starting to look increasingly isolated and out of step with best practice in other industrialized countries. Time to start planning the break-up of Citigroup.”…
    Robert Teitelman–Editor-in-Chief, “The Deal”

  36. zot23 says:

    When half your teeth are rotten, you can spend a ton of money to save them, wait for the rot to spread to the jaw, then pull them out. Or you can pull them out right away for 5% of that cost.

    Volcker is the one eyed man in the land of the blind (and they hate him for it.) His observations are not insightful or new so much as parroting common sense.

  37. philipat says:

    And he’s right. All the cries of “Impossible/Can’t be done in 2010 etc.” are, remember, just part of the well-orchestrated response by Wall Street Lobbyists to protect the greed and bonuses. IMHO, Volcker and Reid are more credible. I don’t WANT my High Street Bank to be taking on huge risk with my money. If I want that, I will buy shares in GS. Even then, I’m increasingly incredulous why folks would buy equity in any firm that pays more in executive compensation than to its shareholders?

    Anyway, because the US has adopted the Japanese model rather than the Swedish model, we have a lot of time to debate this.

  38. ATH says:

    “Its sad to see how silly and narrow-minded Volker has become. He has lost it.”

    Are you kidding me?! I hear more truth from Paul Volker than I do from Geithner, Summers, et al. Yes, Paul is getting on in age, but, heck, at 82, he’s got the experience, wisdom, and the I-don’t-give-a-crap-what-they-think-i’m-going-to-tell-it-like-it-is attitude. In my opinion, Volker rocks!