It looks like Paul Volcker’s pleas are finally being heard in the Obama Administration. Volcker, a past Fed Chairman, has been advocating for a tighter rein on financial institutions since Barack Obama took office. But other voices, including those of Larry Summers, ex-Harvard University president and the current Secretary of the United States Treasury Department, dominated the early discussions about the strategy the White House pursued in an attempt to solve the banking crisis that threatened to cripple the country. Only now have Volcker’s ideas, described by one blogger as "separating the piggy bank from the casino," been taken seriously enough to be advanced as the latest proposal to reform our nation’s banks.
Dubbed "the Volcker Rule", the White House press release describes a proposal that limits commercial banks:
- Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.
- Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.
I worked in or around the financial services industry, in one form or another, for almost twenty years. One of the things I think our president, our Congress, and the general public can’t take into account, whenever they hesitate to really put the hammer down on this industry for fear of over-regulating it, is the mindset of the entire business.
We used to have a phrase that I heard a lot when I was a stockbroker. "The firm always makes money. Sometimes, the broker makes money. And the customer -- who cares about the customer?" These are the kind of businesses where the executives spend practically all of their time and energy thinking up new ways to get more money out of their customers by dreaming up new fee schedules or more confusing commission statements.
So I wholeheartedly agree with the Obama Administration’s intentions, as do a lot of financial experts, but many of them are seeing this latest move against Wall Street by the White House as political window dressing more than anything else.
"This thing is about showing the public that Obama is standing up to Wall Street. So the rhetoric is heated. But the implementation will require far less change than people think right now," a person familiar with the thinking at the upper echelons of one of our largest banks said.
Quite a few others have been even more explicit -- they do not expect any such bill to make it through Congress. Whether or not this proposal actually becomes law, however, it is pretty clear that the Obama Administration has decided to rethink its prior relationship with the nation’s money center banks. I’d like to think that this stance could be the beginning of a movement that actually benefits the public. But something tells me that the army of lobbyists working on behalf of the financial services industry are already rubbing their hands together at the thought of all the new business they are about to get.
Separating the piggy bank from the casino will be considerably harder than it looks.