Banks shouldn't be hedge funds, Volcker tells Senate
Federal safety net shouldn't cover speculators, Obama adviser says
WASHINGTON (MarketWatch) -- The federal safety net for commercial banks should protect depositors, not speculators, former Federal Reserve Chairman Paul Volcker told senators on Tuesday, urging them to pass the so-called Volcker Rule that would ban banks from trading for profit and that would restrict the size of the biggest banks.
Volcker, now an adviser to President Barack Obama, told the Senate Banking Committee that the banking system must be restructured to prevent a repeat of the bailouts of 2008.
The top Republican on the Senate Banking Committee, Sen. Richard Shelby of Alabama, initially said he was open to any idea that would prevent another "calamity," but, after the hearing, he said he was inclined to vote against Volcker's idea. He chastised the administration for "air dropping" its latest proposal months after debate had begun on rewriting the rules of the banking system.
Sen. Chris Dodd, D-Conn., said he "strongly supports" Volcker's proposal.
Banks must not be allowed to reap the benefits of successful speculation while handing taxpayers the costs of failure, Volcker said.
Banks must not be allowed to own or operate as hedge funds. Read David Weidner's commentary on Volcker's testimony.
Instead, commercial banks covered by the federal safety net should be restricted to the profitable businesses of traditional banks: operating the payment system, providing credit, helping customers manage their money.
Volcker said only four or five U.S. commercial banks and only a couple dozen worldwide engage in the kind of risky proprietary trading that would be banned by the Volcker Rule.
He didn't name them, but the firms likely on the list would include Bank of America, JP Morgan, Citigroup, Goldman Sachs and Morgan Stanley.
In addition to the handful of commercial banks whose risks are taxpayer-subsidized, there are thousands of other hedge funds, private equity firms and other institutions that do not have taxpayer protection, yet are actively competing in capital markets, Volcker noted. "They are, and should be, free to trade, to innovate, to invest -- and to fail."
"What we plainly need are authority and methods to minimize the occurrence of those failures that threaten the basic fabric of financial markets," Volcker said. "The essential need is to guard against excessive leverage and to insist upon adequate capital and liquidity."
Commercial banks are covered by federal deposit insurance, access to the Fed's discount window for emergency loans to survive liquidity crises, and the knowledge that some firms are seen as simply "too big to fail." Other types of financial institutions are not explicitly insured by the government...MORE...LINK
Chris Moore comments:
There are claims that U.S. banks will be at a competitive disadvantage to foreign banks if they are not allowed to gamble with taxpayer money, but this is nonsense, and a recipe for communism and fascism. If other countries want to throw taxpayer resources at profiteering sharks and speculators, hence undermining and eroding the integrity of their own markets (and burying their own taxpayers under mountains of debt when those banksters bet wrong) that's their business. But by claiming because country X does so, therefore so should America is like saying that because China has a quasi-Capitalist Communist society, so should America. It won't end until the entire world is divided into Commu-fascist superstates at perpetual war with one another, like Oceania, Eurasia and Eastasia out of Orwell's 1984.
If America is going to go the route of socializing the risk for the big "private" banks by sticking the taxpayers with their losses, then we might as well just nationalize those banks entirely and hire well paid government clerks to do the speculating on behalf of the American taxpayer, because as its stands now, the Wall Street crooks keep all the big profits in the good times, but demand taxpayer subsidies in the bad times. It's a win-win for the banksters, and a loss-loss for the taxpayers. And beyond that, they then throw their ill gotten gains at corrupt politicians to keep the grift going in the form of campaign contributions and crony capitalism.
Who needs these kinds of selfish parasites? They're a big part of the reason America is in the economic toilet, and will never be able to claw its way out until these rats are thrown overboard.