22 February 2010

Five Former US Treasury Secretaries Endorse the 'Volcker Rule'

I do not expect the Volcker Rule to be passed by Congress for the simple reason that the Wall Street banks hate it. They spent hundreds of millions of dollars in lobbying money achieving the overturn of the original Glass-Steagall law.

The Senators who are beholden to the banks will simply not allow this restriction, which 'worked' for almost 70 years as effective regulation.

I have yet to read a coherent reason why the rule should NOT be passed, except that the Banks do not like it. I spent quite a bit of time listening to arguments and reading presentations, and even exchanging emails with a highly respected colleague who was not in favor of it.

Without exception, every argument was specious, misdirected, or founded on spurious assumptions. Most of the alternatives proposed are more complex and require the active vigilance of regulators.

Simple rules are best, and most easily enforced. This is why the banks hate them.

Part of the problem with this rule was the highly awkward method in which the Obama Administration chose to introduce it into the process, with little background and discussion. I would attribute this to the huge split amongst his advisors, with the Summers-Geithner group holding the most influence.

The reform will not be passed, no matter who endorses it. Congress is in the pocket of the Banks. That is the long and short of it, in my opinion.

US Treasury Secretaries of the last 40 years.

John Connally DEAD
William E. Simon DEAD
G. William Miller DEAD
Donald Regan DEAD
James Baker
Lloyd Bentsen DEAD
Robert Rubin
Lawrence Summers

Henry Paulson

Ex-Treasury secretaries back Volcker rule

by Philip Barbara
Feb 21, 2010 8:49pm EST

WASHINGTON (Reuters) - Five former Treasury secretaries urged Congress on Sunday to bar banks that receive federal support from engaging in speculative activity unrelated to basic bank services.

"The principle can be simply stated," the five said in a letter to The Wall Street Journal. "Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services."

The Treasury secretaries said, however, that hedge funds, private-equity firms and other organizations engaged in speculative trading should be "free to compete and innovate" but should not expect taxpayers to back up their endeavors.

"They should, like other private businesses, ... be free to fail without explicit or implicit taxpayer support," said the former secretaries for both Republican and Democratic presidents.

The appeal comes as Senate lawmakers are pressing ahead with efforts to produce a financial regulatory reform bill that would curb some of the practices that led to the 2008 financial crisis.

Several major financial firms collapsed, were sold or had to be bailed out after a bubble in the housing market popped, causing real estate prices to plummet and leaving markets uncertain about the value of billions of dollars in mortgage-backed securities.

The liquidity crisis that followed threatened the financial system and deepened a U.S. recession that became the worst since the Great Depression.

The regulatory reform proposal endorsed by the five former Treasury secretaries is the so-called Volcker Rule, formulated by former Federal Reserve Chairman Paul Volcker, a top economic adviser to President Barack Obama.

Obama surprised the financial markets in late January when he announced the proposal, which calls for new limits on banks' ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.

Volcker told the banking committee earlier this month that a failure to adopt trading limits would lead to another economic crisis and warned "I may not live long enough to see the crisis, but my soul is going to come back and haunt you" if proprietary trading is not curbed.

The five former Treasury secretaries -- Michael Blumenthal, Nicholas Brady, Paul O'Neill, George Shultz and John Snow -- said in their letter that banks should not be involved in speculative trading activity and still receive taxpayer backing.

"We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform," their letter said. "It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities."