While many people have called for the giant, insolvent banks to be broken up, Paul Volcker argues for a different approach: making sure that the taxpayers aren’t paying for their speculative activities which lie outside of traditional depository banking functions.
As Bloomberg writes:
“I do not think it reasonable that public money –taxpayer money — be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization,” Volcker said.
Since January, Volcker has advocated that regulators should prohibit financial companies whose collapse would pose a risk to the economy — those considered “too big to fail” — from engaging in certain types of trading and investing activities. The administration wants stricter oversight for such companies and tighter capital and liquidity requirements.
“Extensive participation in the impersonal, transaction- oriented capital market does not seem to me an intrinsic part of commercial banking,” Volcker said. “Substantial involvement in heavily leveraged finance and heavy proprietary trading almost inevitably entails risks.”
“I want to question any presumption that the federal safety net, and financial support, will be extended beyond the traditional commercial banking community,”
As the Wall Street Journal notes:
Mr. Volcker said banks should be banned from “sponsoring and capitalizing” hedge funds and private-equity firms, which are largely unregulated. He also said “particularly strict supervision, with strong capital and collateral requirements, should be directed toward limiting proprietary securities and derivatives trading.”
He also said collateral and leverage restrictions against the largest nonbank financial institutions “may be needed.”
The comments reflect Mr. Volcker’s long-held view that banks should act more in line with their traditional role and not take extremely risky gambles, which could threaten the viability of commercial banks and expose the Federal Reserve and taxpayers to large risks…
Of course, the people with real power in the Obama administration – Summers, Geithner and Bernanke – don’t want to break up or regulate the too-big-to-fails.
As Yves Smith has repeatedly pointed out, Volcker has been sidelined from the first days of Obama’s cabinet nominations . . . even before Obama was sworn in as President.