Volcker revolution?

[oddlots]

Zero Hedge has posted a paper by the "Group of 30"

"The paper in question is "Financial Reform - A Framework for Financial Stability" and provides for a very insightful read into how regulatory reform will likely look going forward..."

They go through the highlights and conclude:

"... what is stunning is that in 29 pages, including 4 pages of bios, and several index and cover pages, Volcker managed to include enough policy proposals that could and should be the framework for a comprehensive overhaul of all that is broken in the American financial system. He also manages to shame Barney Frank with his 1,1XX pages of irrelevant ramblings (hopefully to resignation).
Volcker has already succeeded on prop trading: there are 17 other proposals remaining, which if implement by Obama, would finally indicate that this president is truly for change, and is not merely a puppet of the D.C./Wall Street corrupt political-hybrid machine."


To a gadfly like me it looks like a return to adult supervision:

"Central Bank lender of last resrort status and collateral transparency requirements (read this Alan Grayson):

Central bank liquidity support operations should be limited to forms that do not entail lending against or the outright purchase of high-risk assets, or other forms of long-term direct or indirect capital support. In principle, those forms of support are more appropriately provided by directly accountable government entities. In practice, to the extent the central bank is the only entity with the resources and authority to act quickly to provide this form of systemic support, there should be subsequent approval of an appropriate governmental entity with the consequent risk transfer to that entity. Central bank emergency lending authority for highly unusual and exigent circumstances should be preserved, but should include, by law or practice, support by appropriate political authorities for the use of such authority in extending such credit to non-bank institutions."

Seems like a good scorecard to rate the degree of "change" really on offer at the very least.

[bill]

Re: Volcker revolution?

82 pages
http://www.itulip.com/forums/showthr...893#post144893

[Slimprofits]

Re: Volcker revolution?

Thank God for Zero Hedge.

That paper was released to the public a year ago.

Everything the Group of 30 publishes is up on their website.

http://www.group30.org/pubs_year.htm

[MulaMan]

Re: Volcker revolution?

The CNN, FOX and GOP are already ramping up to fight this - it will be fun to see all the GOP "fiscal conservative" retards fall in-line against financial reform..

..all over the news today how Obama's irresponsibly is crashing the stock market...

...how Obama's reckless financial reforms will hurt business (ie. wall street), ect..

and of course how according to them (Wall Street) - NO REGULATION / DE-REGULATION = CAPITALISM

REGULATION = COMMUNISM, SOCIALIST, PAGAN, LIBERALS, ... LOL!

[GRG55]

Re: Volcker revolution?

More from Ritholtz...

A “Veneer of Volckerism”

I found myself in an interesting debate this week after reading Noam Scheiber’s Is Obama Really Breaking up the Banks?:

“Many of the press accounts describe how Volcker persuaded members of the Obama economic team to back his approach-most famously during a two-hour Christmas Eve lunch with Treasury Secretary Tim Geithner. There’s an element of truth to this. But when you ask administration officials exactly what they were persuaded of, it’s not that their theory of reform was wrong–that, say, bank size was a major cause of the financial crisis, or that proprietary trading did the banks in.

They were mostly persuaded that they could append Volcker’s ideas to their original approach while keeping its essence intact. “Our view is it’s not counterproductive,” says an official.

Ironically, then, the practical upshot of the Volcker rule may be to advance the administration’s original reform agenda.”

Maybe it was wishful thinking on my part, but I hoped that wasn’t the case.

I pinged Scheiber back: “Adjustment at the margins? Have been living in a cave for the past year the “status quo duo” has been in charge? The Summers/Geithner policy has been dominant, and Volcker was banished from the White House grounds. Sorry, this is a FAIL — You are rationalizing a year of bad policy decisions.

To his credit, Scheiber patiently walked me through his thinking: He suggests the people in the White House and Treasury have no intention of making the Volcker plan — or any other structural change — the centerpiece of their regulatory reform effort. Its not that Volcker has triumphed over Geithner and Summers; rather, this is a cynical political stage dressing — a thin coating of Volckerism stained over their original proposal.

Has Volcker been coopted?

Scheiber argues yes. He notes that Tall Paul is not suddenly at the center of administration conversations over economic policy. Volcker was a periodic visitor to the White House and Treasury before December — but with the exception of the one or two presentations he made about spinning off proprietary trading, he’s still not a regular participant in high-level meetings of the administration’s economic team or the president’s senior aides.

And, he believes Geithner’s safe at least through the midterms; that
Obama likes him personally, and thinks he’s gotten a bad rap after pulling the financial system back from the brink. Also, it’s not Obama’s style to give critics someone’s head.

If that is the case, color me hugely disappointed . . .

[GRG55]

Volcker weighs in...

Volcker weighs in...again...;)

How to Reform Our Financial System

By
PAUL VOLCKER
Published: January 30, 2010

PRESIDENT OBAMA 10 days ago set out one important element in the needed structural reform of the financial system. No one can reasonably contest the need for such reform, in the United States and in other countries as well. We have after all a system that broke down in the most serious crisis in 75 years. The cost has been enormous in terms of unemployment and lost production. The repercussions have been international.

Aggressive action by governments and central banks — really unprecedented in both magnitude and scope — has been necessary to revive and maintain market functions...

...Now the economy is recovering, if at a still modest pace. Funds are flowing more readily in financial markets, but still far from normally. Discussion is underway here and abroad about specific reforms, many of which have been set out by the United States administration: appropriate capital and liquidity requirements for banks; better official supervision on the one hand and on the other improved risk management and board oversight for private institutions; a review of accounting approaches toward financial institutions; and others.

As President Obama has emphasized, some central structural issues have not yet been satisfactorily addressed.

A large concern is the residue of moral hazard from the extensive and successful efforts of central banks and governments to rescue large failing and potentially failing financial institutions...

...The phrase “too big to fail” has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks...

...The point of departure is that adding further layers of risk to the inherent risks of essential commercial bank functions doesn’t make sense, not when those risks arise from more speculative activities far better suited for other areas of the financial markets.

The specific points at issue are ownership or sponsorship of hedge funds and private equity funds, and proprietary trading — that is, placing bank capital at risk in the search of speculative profit rather than in response to customer needs. Those activities are actively engaged in by only a handful of American mega-commercial banks, perhaps four or five...

...Apart from the risks inherent in these activities, they also present virtually insolvable conflicts of interest with customer relationships...

...I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks.

In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly...

I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.

The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.

[we_are_toast]

Re: Volcker revolution?

from naked capitalism;

Yves here. This idea is not politically viable, and it may not be operationally viable. AIG illustrates the difficulty of knowing how big these black holes will be when they open up, and further illustrates that they tend not to happen in isolation (as in a downdraft that can take out one systemically important player has probably imperiled others). It is not acceptable in a democracy to give the Treasury the near-unlimited check-writing authority to deal with systemic failures of highly-connected firms. While he mentions in passing the problems of connectedness, there is not enough focus on it here (and as we have discussed in earlier posts, the initial derivatives reform proposal did not do enough to address the real problem, credit default swaps, and its watered-down version looks certain to leave this product as hazardous as it was before).

And while Volcker does speak of the need for structural reform, which is absolutely necessary, his outline does not go anywhere near far enough to start defusing the bomb that financial services deregulation managed to create.

I believe this problem is solvable, but it requires even more intrusive measures than Volcker contemplates. The lesson of the Great Depression was that firms that benefitted from government guarantees had to be kept on a very short leash, and regulated in such a way that if they stayed within the rules and were competent, they would earn decent, but far from spectacular, profits.

The world has evolved so that many market making activities are now as essential to commerce as deposit gathering and lending. Those activities are de facto backstopped; there is simply no ready way back here (trust me, even if there were, it would take twenty years, and we’d still need an interim solution). We need to regulate those activities aggressively, including requiring much more capital to support them, and strict limits as to how much and what type of credit these firms can extend to hedge fund and other speculative investors.

The unintended message of Volcker’s op ed may be that even someone as tough-minded as he is may not recognize the magnitude of structural change needed to limit the extent of government guarantees to the financial sector and contain officially-backstopped risk-taking. It would be better if I were wrong, but we may need yet another crisis to produce the needed political will.

http://www.nakedcapitalism.com/2010/...ot-get-it.html

[GRG55]

Re: Volcker revolution?

from naked capitalism;

...The unintended message of Volcker’s op ed may be that even someone as tough-minded as he is may not recognize the magnitude of structural change needed to limit the extent of government guarantees to the financial sector and contain officially-backstopped risk-taking. It would be better if I were wrong, but we may need yet another crisis to produce the needed political will...

http://www.nakedcapitalism.com/2010/...ot-get-it.html

Toast, as you know better than most, politics is the art of the possible. And I suspect Volcker knows full well the magitude of structural change needed. And he also knows the limits of what may be possible under present circumstances.

And yes, Yves is likely correct...judging by what has being reported out of Davos on this subject it probably will take another [deeper] crisis to create the international circumstances needed...

[we_are_toast]

Re: Volcker revolution?

Toast, as you know better than most, politics is the art of the possible. And I suspect Volcker knows full well the magitude of structural change needed. And he also knows the limits of what may be possible under present circumstances.

And yes, Yves is likely correct...judging by what has being reported out of Davos on this subject it probably will take another [deeper] crisis to create the international circumstances needed...

Yep, I fully agree. Volcker is trying to walk a fine line. Trying to be political, and not spook the markets. Yves is being too tough on him here, but I think we all share in the frustration of not being able to cook up a batch of tar, grab a bag of feathers, and head for wall street.

[hankhill]

Re: Volcker revolution?

GRG55,

This excerpt made me chuckle, Barry Ritholtz wrote it in "Bailout Nation."

The Naughty Child Index

For those who have a hard time conceptualizing the differences between Bear Stearns, Lehman Brothers, and AIG, consider the Naughty Child Index.

Lehman Brothers is like the little kid pulling the tail of the dog. You know the kid is going to get hurt eventually, so no one is surprised when the dog turns around and bites him. But the kid hurts only himself and no one else. No one really cares that much.

Bear Stearns is the little pyromaniac-the kid who is always playing with matches. He could not only harm himself, but burn the house down and indeed burn down the entire neighborhood. The Fed steps in to protect not him, but the rest of the block.

AIG is the kid who accidentally stumbles into a biotech warfare lab and finds all these unlabeled vials. He heads out to the playground with a handful of them jammed into his pockets.


I'm probably naive but I'm surprised that we haven't seen the torches and pitchforks out in force.

[Jay]

Re: Volcker revolution?

Real reform would be refreshing. It would also likely bring the whole house of cards down in a giant heap. That is unless this recovery is actually real, and I have my doubts. So unless there is new sustained growth, I think as soon as things begin to crumble, reform takes a back seat and we get casino again.

[oddlots]

Re: Volcker revolution?

There's a good analysis of Volcker's op-ed cited above by Yves of Naked capitalism here.

For those in the cheap seats or sitting at the kid's table like me, it's a sobering look at the practical difficulty of extracting ourselves from FIRE in all its current glory. (And so, a good antidote to the hope that uncle Paul is going to somehow achive a revolution of common sense.)

[cjppjc]

Re: Volcker weighs in...

Volcker weighs in...again...;)

How to Reform Our Financial System

By
PAUL VOLCKER
Published: January 30, 2010


— for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.

And people always look to twist the rules.

[Chomsky]

Re: Volcker revolution?

Looks like the Volcker plan is already dead.

http://www.ft.com/cms/s/2/76c55844-0...b5df10621.html