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Today, Mr. Volcker spoke out about his reform against U.S. investment banks and proprietary trading. After the speech, it looks likely that the rule will not go forward in its original form.
The former Federal Reserve Chairman called out recently to limit bank’s proprietary trading, principal investments, hedge funds, and private equity divisions.
On the opposing end, Senator Richard Shelby (Republican) opposed both the Volcker Rule and President Obama’s decision to levy a $90+ billion tax on U.S. large cap banks. Although the Leverage Academy team does not feel that these two rules will be approved of in their original form, a tax or some form of penalty for using taxpayer funds for principal investments may still be passed by the House and the Senate.
Since Democrats do not have the necessary 60 votes needed to enforce this reform package, it will only pass with Republican support.
Even the House Financial Services Subcommittee Chairman Paul Kanjorski told the Financial Times that he was only 80% to 85% in agreement with the Volcker rule and that many issues raised by Volcker were already included in his amendment passed by the House.
According to the Financial Times, one of the most outrageous demands today was from Warner, who said he is proposing that US banks set up a USD 1trn fund to invest in US infrastructure projects as a way to avoid the USD 90bn bank levy. When probed, a staffer said that Warner is not calling for the banks to place USD 1trn in cash, but to raise such an amount through leverage…
Below is a live blog of the speech by the Wall Street Journal…
Text begins here:
So Mr. Volcker, what is prop trading anyway? It is the $64,000 (make that the multi-billion dollar question) for Wall Street.
So far, the former Federal Reserve Chief, who is now spear heading the Obama administration’s effort to overhaul the banking system, has been pretty vague on exactly what constitutes proprietary trading — or trading on behalf of a bank, rather than its customers. A copy of Volcker’s prepared testimony is more specific about what Volcker thinks banks should do, rather than what he thinks they should not do.
Other key issues that Volcker is likely to address in his testimony before the Senate Banking Committee are proposing capital and leverage restrictions on large banks.
Deal Journal is live blogging the hearing.
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- 2:36 pm
- by Michael Corkery
Chairman Chris Dodd is opening up the hearing, just as President Obama has finished his remarks at a town hall meeting in Nashua, NH. This is like the well-oiled Obama presidential campaign when everything was highly orchestrated.
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- 2:40 pm
- by Michael Corkery
Sen. Shelby: He’s “disturbed” by the way Obama has sneaked in the Volcker rule seven months after it first proposed financial reform that it called “sweeping.” Is Shelby suggesting that politics may have played a role in the timing of Obama’s latest proposal? No. Really?
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- 2:41 pm
- by Michael Corkery
That said, Shelby says he supports the Volcker Rule…
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- 2:43 pm
- by Michael Corkery
Volcker is Up: Right off the bat he goes to Prop Trading…He says it’s not an issue of whether prop trading is bigger risk than others. It is a risk. Period. And taxpayers shouldn’t backstop that risk.
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- 2:49 pm
- by Michael Corkery
Volcker: This is about two big to fail. We have to limit banks and non-banking institutions from engaging in activities that could require a bail out…He references AIG and GE Capital…
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- 2:52 pm
- by Michael Corkery
Volcker: Bank supervisors with “strong legislative direction” sould be able to contain excess in trading. Wait a second. Is Volcker proposing to leave it to the banks to decide what is risk and not risky? Um, that didn’t really work too well.
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- 2:55 pm
- by Michael Corkery
Volcker hasn’t looked up once from his prepared testimony.
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- 3:00 pm
- by Michael Corkery
This is dry stuff. Bring Back Geithner or Blankfein.
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- 3:02 pm
- by Michael Corkery
Volcker: Trading “incidental” to customer interests would be OK. Trading that is not explicitedly done on behalf of the customer is not OK.
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- 3:07 pm
- by Michael Corkery
Dodd asks but isn’t “hedging” good for bank? Couldn’t that be seen as propreitary behavior?
Volcker brings up a good example: AIG had credit defaualt swaps which were designed to be hedges, but when AIG doubled down on CDS they were no longer hedges, but an added risk.
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- 3:07 pm
- by Stephen Grocer
Dodd asks: If the U.S. adopts the Volcker rule and other don’t, has U.S. left its institution in a weaker competitive position?
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- 3:09 pm
- by Stephen Grocer
Volcker counters that the plan has receive support elsewhere, especially London.
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- 3:10 pm
- by Michael Corkery
Shelby: There is no evidence that prop trading fueled the losses that contributed to the credit crisis. Plus, Bear and Lehman were not commerical banks yet were more interconnected and posed systemic risk. So why so much focus on prop trading
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- 3:11 pm
- by Michael Corkery
Volcker is not really answering the question.
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- 3:15 pm
- by Michael Corkery
Volcker just compared ‘too big to fail’ institutions to pornography…”you know it when you see it.” That’s a new one.
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- 3:18 pm
- by Michael Corkery
Grocer, Volcker says he’s not naive and he’s been around for a long time, but does he really think that he can get other countries, like the UK and France, to agree to enact similar restrictions?
It’s hard enough to get the U.S. Congress to agree to these rules.
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- 3:24 pm
- by Michael Corkery
Volcker: It’s not theoretical the conflicts of interests inherent of prop trading. It’s inenvitable that you will trade against the interest of your customers. But he has no specifics.
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- 3:28 pm
- by Stephen Grocer
Corkery: If the Conservatives are elected in the U.K., London might get a version of the rule. But EU has indicated that it is unlikely to follow the U.S. lead if it passes the Volcker rule. That would definitely put U.S. institutions at a disadvantage.
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- 3:28 pm
- by Michael Corkery
Volcker just joked that he’s always thought that a “Chinese Wall” is actually permeable. “It didn’t keep out the Huns, did it?” Banks have said that there is a chinese wall between depository and prop activiity. Economist humor.
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- 3:32 pm
- by MIchael Corkery
These Senators are going easy on Volcker. I guess it wouldn’t look good to gang up on the elder, grandatherly academic. But the former Fed chair is admitting to a lot of unknowns in his proposal.
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- 3:37 pm
- by Michael Corkery
Volcker is finally showing a little animation. Sen. Corker is telling him that commerical banks cannot move money from the commerical side of the bank to another part of the bank. “You don’t think they can do that,” Volcker says.
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- 3:40 pm
- by Michael Corkery
Dow has stayed up 115 points. Looks like the market thinks the Volcker Rule is a dead on arrival in the Senate.
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- 3:43 pm
- by Michael Corkery
Volcker: If Goldman wants to keep prop trading they have to give up banking license and access to cheap capital at the Fed window.
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- 3:47 pm
- by Stephen Grocer
Volcker declines to rank which of the activities — private equity, hedge funds or proprietary trading — is riskiest.
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- 3:52 pm
- by Michael Corkery
Sen. Mike Johanns: “I get more confused as you testify. You are not clearing it up.”
Finally someone said it. -
- 3:54 pm
- by MIchael Corkery
Volcker: “I am puzzled why I am losing you.”
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- 3:56 pm
- by Michael Corkery
Volcker says his rule wouldn’t have stopped AIG or Lehman. But the “comprehensive” reforms by the Obama administration would have stopped those problems.
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- 3:57 pm
- by Stephen Grocer
Sen. Johanns is raising the question of the day: How will the Volcker rule have prevented the financial crisis. It would not have solved the problem with AIG or
Volcker responds: That rule was not designed to solve the problems of those firms.
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- 3:58 pm
- by Michael Corkery
Best quote of the hearing.
Volcker: The issue is look ahead. I am telling you if banks are protected by tax payer and given free rein to speculate. There are going to be problems. “I may not live long enough to see the next crisis. But my soul is going to come back to haunt you.”
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- 3:59 pm
- by Stephen Grocer
Volcker points out his rule is designed to solve future problems, not just the regulatory gaps laid bare by the current financial crisis.
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- 4:12 pm
- by MIchael Corkery
Sen. Jim Bunning: Wait, I thought your goal was about preventing banks from getting too big to fail. But this proposal does nothing to require banks to shrink.
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- 4:18 pm
- by Michael Corkery
From the sounds of the senators skeptical questioning, Volcker’s rule looks to be on thin ice. The hearing was not a total wash out: Volcker warned that his ghost will come back to haunt the Senate if they don’t listen to him. That will be a quote that will no doubt be pulled out years from now for that inevitable “I told you so” moment.
~I.S.
- For more information, please visit WSJ…
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