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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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We have become dependent on the accuracy of the ratings, and yet the agencies that issue them are unregulated and are far from objective… Clearly we cannot continue at status quo.

 

Three cheers: to James Surowiecki of the New Yorker

In protecting Main Street, it is rare that I give banks and regulators a break. However, given the lack of attention to another guilty branch of the financial sector, they are going to get a brief (if undeserved) reprieve from me. The other blameworthy party that I speak of is the credit ratings agencies. Let me explain.

Credit rating agencies assess and label the riskiness of financial instruments (AAA being the best). As this recent New Yorker piece by James Surowiecki details, a problem arises because the rating agencies are privately owned and yet the S.E.C. anointed three of them as official ratings agencies—thus instilling a special trust in them by investors. And that was forty years ago. Today everything—from rules and regulations on financial instruments to interest rates—depends on these ratings.

So what happens when these agencies drastically overestimate the soundness of mortgage-backed securities? In part, that is what caused our current economic situation. The article explains the problem: we have become dependent on the accuracy of the ratings, and yet the agencies that issue them are unregulated and are far from objective. I must commend Mr. Surowiecki for this insight. When the agencies gave mortgage-backed securities a rating of AAA, investment flooded to them, creating the all-too-famous housing bubble. When, in light of the housing crash, the agencies harshly downgraded the securities, it drastically accelerated the bursting of the bubble.

Clearly we cannot continue at status quo. As in other under-regulated fields, Main Street became the victim of overzealous and unchecked standards. What can we do about these agencies? The New Yorker suggests scrapping the ratings agencies altogether, reasoning that no faith is better than false faith. I don’t know if that is the answer—it would be preferable to merely disconnect the ratings agencies from governmental endorsement—but clearly Main Street must be spoken for here as well. Hopefully my voice on this issue will couple with the Mr. Surowiecki of the New Yorker to be the first of many to advocate sweeping reform.

Assisted by David Martin.

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