EconoMonitor

Volcker Rule Chatter

Barron’s Review Column asks various people “Is the plan to curtail banking activities and rein in risk-taking a good idea?” 

Here are a few of their answers:

“These new ideas are all good stuff…and entirely justified. Everyone…knows banks trading their own capital like a hedge fund is a conflict of interest….[It] was indeed the rot at the heart of our financial problems.” -Jeremy Grantham Co-founder, Chief Investment Strategist, GMO, in a recent client letter

“Trading did not lead to the financial crisis. While we await details of the plan, our initial observation is that rather than arbitrarily banning certain activities, or setting arbitrary size limits, [we] should focus on improving risk management, internal controls, corporate governance and supervisory oversight, and creating the authority to wind down large financial institutions.” -Rob Nichols President, COO, Financial Services Forum

“Nearly a year ago, we investors recommended enhanced bank regulation to avoid a repeat of the financial crisis, that OTC derivatives markets be eliminated, and that proprietary trading [not] be permitted to jeopardize banking operations. Industry’s reaction to the Volcker rule makes it look like it has amnesia.” -Kurt Schacht Managing director, CFA Institute Centre for Financial Market Integrity

Interesting perspectives . . . My own view is nuanced:

-Risk-taking is fine; excessive risk taking is a problem. And ANY Risk-taking without the ability to pay off your bad sepculative bets is totally unacceptable. That is a form of “Heads I win, tails you lose” that is a recipe for taxpayer financed disasters;

-Prop trading did not cause the crisis, but it presents a future risk. If Banks want access to cheap Fed money, taxpayer backed guarantees, and FDIC insurance, than no prop trading.

You get to choose what type of financial institution you want to be: Hedge fund? Insured Commercial Bank? Leveraged Investment House? Sure! However, if you choose the FDIC/taxpayer backing, you have to forgo the other two choices.

Source: They Said What? The Volcker Rule ROBIN GOLDWYN BLUMENTHAL Barron’s FEBRUARY 1, 2010 http://online.barrons.com/article/SB126481011371437491.html


Originally published at The Big Picture and reproduced here with the author’s permission.
 
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One Response to “Volcker Rule Chatter”

Mark ChalekFebruary 1st, 2010 at 2:49 pm

This is so common sense as to beg the question why it took Obama a year to figure it out. Did Timmy and Larry hypnotize him on deregulation and lemon socialism?

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