A return to 'narrow banking' is in the cards. This is the kind of bank which takes depositors funds and originates and services loans to its own customers.
These banks will be separate from investment banks and hedge funds, which will perform the speculation and packaging, and what can loosely be called financial engineering.
But look for much more uniform regulation and transparency to appear in these non-banking operations, and less acceptance for 'dark pools' and opaque market manipulation.
And for those who say we will lose this type of person to less regulated overseas venues, there will be a new attitude to cross border banking and restrictions on the activity of institutions that do not adhere to a uniform set of standards.
It will be an even greater step in the right direction if we can realize that this same sort of regime should prevail in overseas trade as well. There will be little taste for the toleration of sweatshops, child labor, and the virtual slavery that multinational business craves, and justifies with the most venal and shallow of arguments.
AP
Volcker sees crisis leading to global regulation
By Eileen Aj Connelly, AP Business Writer
Friday February 20, 6:29 pm ET
Volcker sees greater international cooperation on regulations growing from economic crisis
NEW YORK (AP) -- "Even the experts don't quite know what's going on."
Speaking to a number of those experts Friday, Paul Volcker, a top economic adviser to President Barack Obama, cited not only the lack of understanding of the global financial meltdown but the "shocking" speed with which it had spread across the world.
"One year ago, we would have said things were tough in the United States, but the rest of the world was holding up," Volcker told a conference featuring Nobel laureates, economists and investors at Columbia University in New York. "The rest of the world has not held up."
In fact, the 81-year-old former chairman of the Federal Reserve said, "I don't remember any time, maybe even the Great Depression, when things went down quite so fast."
He noted that industrial production is falling in countries across the globe faster than in the U.S., one result of the decline caused by the breakdown of unbridled financial markets that operated on a global scale.
"It's broken down in the face of almost all expectation and prediction," he noted.
Volcker didn't offer specifics on how long he thinks the recession will last or what will help start a recovery. But he predicted there will be some lasting lessons from the experience.
"I don't believe it will be forgotten ... and we will revert to the kind of financial system we had before the crisis," he said.
While he assured his audience of his confidence that capitalism will survive, Volcker said stronger regulations are needed to protect the world economy from such future shocks.
And he said he is concerned about the amount of power central banks, treasuries and regulatory agencies have acquired while trying to contain the meltdown.
"It is evident in the United States, and not just in the United States, the central bank is taking on a role that is way beyond what a central bank should be taking," he said.
Volcker stressed the importance of international cooperation in creating a new regulatory framework, particularly for major banks that operate across national boundaries -- the reverse of what's happened in recent years.
"The more international agreement we have on where we want to get to, the better off we'll be," Volcker said.
And while major banks should be more tightly controlled and less able to make the sort of risky bets that led to their current debacle, Volcker said there should also be more oversight of some kind for hedge funds, equity funds and the remaining investment banks.
He scoffed at the notion that those entities must be free to innovate -- stating that financial "innovations" like asset backed securities and credit default swaps have brought few benefits. The most important "innovation" in banking for most people in the last 20 or 30 years, he maintained, is the automatic teller machine.
20 February 2009
Volcker's Vision of a Return to Narrow Banking
Major Banks Will Be Nationalized Eventually: Wall Street's Dirty Little Secret
The dirty little secret that Wall Street does not wish you to understand is that the banking model which the US has had for the past twelve years was unsustainable, it is over and done, and banks must go bank to being banks, and not hedge funds.
Why doesn't the Street wish you to realize this? First and foremost, the days of big bonuses and big earnings are over. Banks will increasingly become, once again, institutions to support savings and lending, with insured depositors accounts as a major source of capital.
The leveraged days and market speculation for the big money center banks is over.
We no longer need big salaries to retain traders in the banks because they won't be doing much trading for their own accounts anymore. That will be left to the brokerages.
They won't be writing insurance, they won't be taking huge short positions in commodities, and they won't be to big to fail, at least not to this degree with single institutions threatening national solvency.
We need to strike a model of what wish to have as a national financial system, and begging to invest towards that, and not try to reflate a bubble that ought never to have existed in the first place.
Nationalization does not mean the banks will be run by the government. It means that they will be taken into receivership, broken up, and made once more into banks. Those which are not nationalized must be constrained by a new "Glass-Steagall" law limiting their ability to imperil the national economy for their own personal gambling interests.
That is the point that is being lost in this opaque analysis and muddled discussion. The Big Money Center Banks will be nationalized one way or the other. The only real variable is how much money they can take out of the system before it happens.
Bloomberg
Dodd Says Short-Term Bank Takeovers May Be Necessary
By Alison Vekshin
Feb. 20 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd said banks may have to be nationalized for “a short time” to help lenders including Citigroup Inc. and Bank of America Corp. survive the worst economic slump in 75 years.
“I don’t welcome that at all, but I could see how it’s possible it may happen,” Dodd said on Bloomberg Television’s “Political Capital with Al Hunt” to be broadcast later today. “I’m concerned that we may end up having to do that, at least for a short time.”
Citigroup and Bank of America, which received $90 billion in U.S. aid in the past four months, fell as much as 36 percent today on concern they may be nationalized. Citigroup, based in New York, fell as low as $1.61. Bank of America, based in Charlotte, North Carolina, tumbled as low as $2.53.
President Barack Obama’s administration is resisting the idea of nationalizing banks, said Dodd, a Connecticut Democrat. “They prefer not to go that way for all of the reasons that we’re familiar with in terms of the symbolic notion of nationalization of major lending institutions,” he said.
The Obama administration strongly believes a “privately held banking system is the correct way to go,” White House spokesman Robert Gibbs told reporters at a briefing today. “That’s been our belief for quite some time, and we continue to have that,” Gibbs said.
‘Leeway’ on Compensation
Treasury Secretary Timothy Geithner has “an awful lot of leeway” in interpreting the restrictions on executive compensation included in the economic stimulus bill and opposed by the banking industry, Dodd said today.
Treasury officials are still examining how to implement the new compensation restrictions and have not yet determined whether they will apply to participants in the administration’s rescue plan or only to banks and companies that get cash injections from the Troubled Asset Relief Program.
Compensation consultants including Alan Johnson, founder of Johnson Associates Inc. in New York, said the rules may be “catastrophic” to Wall Street’s talent base. The caps made top- producing employees “nervous,” and those who can find other jobs will probably leave, said James Reda, who heads a compensation firm in New York.
“I’m sort of stunned in a way that some people are reacting the way they are about all of this,” Dodd said. “At a time like this, everyone needs to pull in the same direction.”
Dodd also said he doesn’t want U.S. automakers to go through a prepackaged bankruptcy or a “forced merger.” General Motors Corp., Ford Motor Co. or Chrysler LLC risk liquidation with such actions, Dodd said on the broadcast.
