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Paul Volcker – a voice for reasonable regulation on Wall Street

Paul Volcker, for decades a lion in the regulatory community, has had an undeniable impact on the new financial regulations moving across President Obama’s desk. All proponents of Main Street should applaud him. Mr. Volcker, former chairman of the Federal Reserve Board under Jimmy Carter and Ronald Reagan, has recently found his voice as lead Economic Advisor to President Obama. The proof:

The Volcker rule:   A key piece of the financial reform legislation, which President Obama signed into law earlier this week.  The rule will help ensure a dividing line between commercial and investment banks.

Mr. Volcker hoped for a complete separation of traditional banking from investment/hedge fund banking industries. Recall, this was the way of the world before the drastic deregulation of the 80’s and 90’s.  Unfortunately, today’s political reality would not permit such a stark division of commercial banks and investment banks. Instead of a complete separation of functions, the bill that President Obama signed into law limits commercial banks to investing just 3% of their capital in investments that do not benefit their customers. In other words: trading for their own account and perhaps contrary to the interests of their customers and the public. And as we now know getting into enough trouble to need a multi-billion dollar bail out. 

Volcker, always a thoughtful proponent of government regulation, was largely cast aside and silenced during the economic booms spurred by deregulation. In a recent interview with the New York Times, Volcker called the idea of a self-regulating market an illusion which he is happy to see shattered.  

This week, we salute Mr. Volcker for his efforts on behalf of the Main Street and the public. Despite Wall Street’s kicking and screaming, Volcker’s singular gravitas has successfully stood up to those Gucci wearing lobbyists of the financial industry. Although not enough, the Volcker rule is a step in the right direction. It helps Main Street to be sure. Unless banks find a creative way around it, we should be spared – at least for awhile –  the volatility and cost associated with the unbridled greed of banks we all witnessed the last several years.

Assisted by Zachary Kady

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In many ways, the days of Tammany Hall and Boss Tweed are deep in the rear view mirror.  Politics is surely more transparent these days.  There are many more stakeholders to be reckoned with:  unions, non-profits, civil rights organizations and foundations just to name a few.  But thanks in part to the Supreme Court, large corporations  will dominate the game.   And oh are they good at playing the game.  They know where to focus and can contribute directly to the campaigns of congressional members whose job it is to regulate them and their industry.  A conflict of interest to be sure; but it’s legal and just part of the game.

In last Sunday’s editorial, the New York Times detailed the dubious fundraising ethics of certain members of congress. Chief among these ethical offenders are those esteemed members of the Financial Services Committee. These powerful congressmen, just days before votes on a seismic  regulation overhaul, continue to plan and throw together fundraising events for officials of the very corporations they will regulate. Representatives of the financial industries come from all over the country to meet with elected officials, to dine, and to share their two cents – more like millions of cents.  Why now? Because money is flowing and campaigns are ever more expensive. 

The banks and their lobbyists sure know how to play the game.  Public outcry may be loud for now, but memories are short.  Behind the scenes – the lobbyists are getting face time and putting in all those provisions and loop holes that water down high profile legislation.  In the end, we are right back where we started before a financial collapse (of our own making) was days away from igniting a worldwide economic catastrophe. 

Private interests regularly flood congress with money, biased information, and campaign contributions – this is nothing new. But we should have learned something from being on the brink.  Congressional leaders must decline dinner dates with financial heavy-hitters.  It’s time instead to soberly contemplate real reform,  Indeed, what we really need is a sea change in the way we value risk and reward our executives.  Those hard issues cannot be contemplated over gourmet dinners with lobbyists and their clients sipping $250 bottles of wine.  Left unfettered, the banks are winning and Main Street  is destined to lose again.

Assisted by Zachary Kady

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“It seemed inconceivable that bankers would, just a few months later, be going right back to the practices that brought the world’s financial system to the edge of collapse.”

-          Paul Krugman

I think I speak for most Americans when I say I have a visceral distaste for the government dictating salaries. Come on; some faceless bureaucrat in Washington deciding how much money I make? It takes the “free” out of “free enterprise” system. This country has thrived on a dream—perhaps it is just that—but even if it’s a myth—it is in our fiber as a nation: anyone can rise from a new and nearly penniless immigrant to a millionaire, heck even a billionaire. So regulating salaries for me takes a big leap of faith and a gulp.

But we need to do something about the financial sector. That sector is different. Indeed, it is profoundly different after Main Street stepped up to mortgage its future (and that of its children and children’s children) to bail it out just a year ago. And the thanks Main Street gets is a new round of skyrocketing bonuses earned on pure speculation. 

I have written about my extreme concern that Wall Street is returning to standard practice circa 2007. If my voice is insufficient, Monday’s New York Times features the opinion of an economist who has been by-and-large dead-on about every aspect of the crisis we find ourselves in. Yes, Nobel Laureate Paul Krugman.

Mr. Krugman does not have a blog dedicated to protecting Main Street. However, his recent article should make evident the urgency of regulating bonuses paid to the financial sector. At the risk of sounding like a broken—and apocalyptic—record, the current crisis will not be the last of its kind if it does not lead to reform. 

This is why it is of crucial importance to heed Mr. Krugman. While the political clout of the financial industry and its gaggle of lobbyists are surely powerful, they must be challenged. The simple fact is that Main Street needs—and moreover, deserves—the assurance that executive pay is fair. At any political cost.

Rewards must be tied to long-term value and growth in the economy—not simply the successful invention and guileless trading of financial instruments. Those efforts merely increase turbulence and risk—something  those of us struggling to pay our mortgages, fund college for our kids and have a little extra to put away for retirement hardly need.

I second Mr. Krugman’s demand for regulation of this industry. Anything else would be a severe injustice to Main Street.

Let’s just hope a few more people with greater influence than me are on board.

Assisted by David Martin (North Carolina 2010) and Jessica Begen (Georgetown 2010).

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Securitization of life settlements is yet another dangerous development for Main Street. Is this really what we need right now?

It just doesn't stop. Despite repeated lessons and tales from the brink (the collapse and near collapse of Lehman Brothers and Bear Stearns to name just a few), Wall Street is at it again. What now, you ask? Wall Street is securitizing life insurance policies. What the heck is that?

A recent New York Times article details "life settlements"--which have Wall Street executives' mouths watering. The premise is this--elderly people sell their life insurance policies for fractions of what they are worth to banks. Wall Street then repackages these policies into bonds, grabs fees and sells them, netting dealers even more fees--and creating another speculative industry. This time betting on when grandma will die. And what's next derivatives on these bonds.

Securitization of life settlements is yet another dangerous development for Main Street. Industry sources explain that insurance companies are able to maintain premium rates based on the profit they make from policy lapses. If life settlements are securitized and traded, Wall Street will pay the premiums and the insurance companies will be out the easy profits from the millions of policies a year that lapse. Ultimately they will be forced to raise premiums to continue earning profits. Who, then, will suffer the true consequences? Main Street, once again.

Is this really what we need right now? In a time when the economy is inching towards a recovery from a crisis caused by precisely what is presented here: the opportunity for a new overaggressive and under-regulated speculative market? And who is going to be able to regulate these new instruments of greed so that Main Street does not become the victim?

We have a better idea for Wall Street.

Go back to basics. Finance renewable energy products, figure out an innovative way to finance new infrastructure--so sorely needed. Maybe even come up with a new micro-loan product that works for hard working Americans who want to start small businesses.

Let's let the securitization of life insurance policies die a peaceful death.

Assisted by David Martin and Jessica Begen.

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