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With advanced degrees in both economics and finance, I place great deal of importance upon macreconomic developments and fundamental analyses of industries and individual companies In typical markets, I seek out investment themes which offer compelling reasons to invest in a group of like... More
  • Volcker: Casino Activities Up, Lending Down 4 comments
    Sep 20, 2009 08:47 AM

    While the insiders on Wall Street and Washington pander about real financial regulatory reform, former Fed chair Paul Volcker yesterday hit ground zero on this hotly debated topic.

    The heart of financial regulatory reform is centered on the implementation of leverage by our largest financial institutions. The leverage is exercised in a wide array of activities, both on and off-balance sheet. The capital utilized by the banks in these activities is credit that has not and will not flow directly through to the economy. Why? The banks believe that they will generate a greater return on the capital via proprietary activities rather than facilitating client business and addressing customer needs.

    These proprietary activities, housed in balance sheet trading books and also in off-balance sheet SIV’s (structured investment vehicles), provided many nails in our economic coffin. While the Fed has provided the liquidity to refloat the markets (and to a lesser extent the economy), Wall Street banks are fighting hard to maintain as much of their proprietary activities as possible. Washington is largely dancing around the edges of the banks’ balance sheets in proposing financial regulatory reform. Until now. Paul Volcker hits Wall Street hard in promoting the end of the banks’ hedge fund like activities. The Wall Street Journal details Volcker’s bombshell in writing, Volcker Calls for Restricting Banks’ Risk, Trading Activity:

    Former Federal Reserve Chairman Paul Volcker on Wednesday said banks should operate in a much less risky fashion, including not making trading bets with their own capital, comments that could provoke intensified debates over the future of financial regulation.

    Mr. Volcker, who currently is chairman of the White House’s Economic Recovery Advisory Board, suggested banks should be restricted to trading on their client’s behalf instead of making bets with their own money through internal units that often act like hedge funds.

    “Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking,” he said in a speech to the Association for Corporate Growth in Los Angeles.

    Mr. Volcker’s comments could put him at odds with the Obama administration’s proposal for new financial rules. The White House has called for more oversight of banks’ operations but doesn’t push such strict limits on what they do.

    Believe me, the Wall Street lobby is working overtime to delay and dilute the impact of even the shallow regulatory reforms currently proposed by Washington. Volcker’s proposal would serve to dramatically change the very nature of how Wall Street operates. I welcome it on a number of fronts, as it would promote economic activity and financial intermediation, including:

    1. prioritize extension of credit to Main Street

    2. lessen systemic risk on Wall Street

    3. dramatically lessen the incestuous nature of the Wall Street-Washington relationship

    4. promote much greater transparency in our financial framework

    5. level the playing field on our equity exchanges

    6. diminish the propensity for insider trading activity on Wall Street

    Mr. Volcker takes on the White House and Congress with his proposal. We know Volcker is no favorite of Larry Summers. Knowing the explosiveness of his proposal, Volcker is not bashful in addressing the discomfort his proposal would create for the Washington insiders who are in Wall Street’s pocket. The WSJ sheds further light on this point:

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This post has 4 comments:

  •  
    Good article, Cautious. Why isn't Volcker leading the charge, instead of Bernanke?
    Sep 20 09:18 AM | Link | Reply
  •  
    Interesting question Michael. After being bailed out and nothing likely to come from financial reform, reinstated bonuses, resumption of casino activities and a lockdown on traditional lending activities, something is missing; how can they exercise so much unchecked power? Is it because they buy so many congressional seats or are the lines between the Fed, Treasury and Cartel really that blurred?
    Sep 20 09:51 AM | Link | Reply
  •  
    I think that is it exactly. The corruption is now so deep that there is no way to fix the tree except by digging up the roots.


    On Sep 20 09:51 AM CautiousInvestor wrote:

    > Interesting question Michael. After being bailed out and nothing
    > likely to come from financial reform, reinstated bonuses, resumption
    > of casino activities and a lockdown on traditional lending activities,
    > something is missing; how can they exercise so much unchecked power?
    > Is it because they buy so many congressional seats or are the lines
    > between the Fed, Treasury and Cartel really that blurred?
    Sep 20 10:21 AM | Link | Reply
  •  
    So far, politicians were honest: their primary intentions were to BAILOUT of the Wall-Street banks.

    Politicians never sereously discussed any changes or reforms. It is understandable since they are a part of the problem, and they are quite happy with the present status.

    As for Mr. Volcker, he understands very well that the system is broke and a continuation of the present status quo is letal to the US economy.
    Sep 20 04:34 PM | Link | Reply
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