White House economic adviser Paul Volcker on Tuesday took to Congress his call to curb risky investing by big banks, warning that his soul would haunt lawmakers when the next banking crisis hits if they did not heed him now.
The 82-year-old former Federal Reserve chairman, whose star is rising in the administration of US President Barack Obama, faced questions about the White House’s latest and far-reaching proposals for a crackdown on the banking industry.
Obama stunned financial markets late last month by calling for new limits on banks’ ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.
Volcker, considered a sage of monetary policy and a crusader for tighter regulation, conceded such a move would not have prevented the debacles at AIG and Lehman Brothers at the heart of the 2008 financial crisis.
ANOTHER CRISIS
However, he said not adopting trading limits would lead to another crisis in the future.
If proprietary trading is not curbed, Volcker told the Senate Banking Committee: “I may not live long enough to see the crisis, but my soul is going to come back and haunt you.”
Analysts have speculated about exactly what would be off-limits if Congress adds the proposal to a sweeping package of financial regulatory changes that is still being debated.
Some see a blurred line between proprietary trading and market-making that helps customers, but Volcker disagreed.
“Bankers know what proprietary trading is and is not. Don’t let them tell you any different ... I don’t think it’s so hard,” Volcker told lawmakers pressing for a clearer idea of where the regulatory lines would be drawn.
Treasury Deputy Secretary Neal Wolin, who testified alongside Volcker at the hearing, provided few new details.
Under the Obama proposals, banks could not establish or maintain a separate trading desk, capitalized with their own resources and unrelated to customer business, Wolin said.
That could mean barring banks from using such trading desks to speculate on the prices of oil, gas or equity securities, he said, adding that the restrictions should apply to all banks, including US operations of foreign banking firms.
Senator Christopher Dodd, the Democratic chairman of the committee, said he strongly supports Obama’s proposals.
‘QUITE DISTURBED’
Senator Richard Shelby, the panel’s top Republican, said he was “quite disturbed” by Obama’s proposals being “air dropped” into the financial regulation debate, which is more than a year old, but said he was willing to consider them.
Senator Bob Corker, another Republican, questioned the need to crack down on proprietary trading at commercial banks, saying that firewalls already exist within bank holding companies to protect deposit-based activities.
Despite the firewalls, Wolin said, banks that do proprietary trading enjoy a cheaper cost of capital because of the taxpayer backing of the deposit-funded sides of their business models, which he said is unfair and should end.
A second hearing was set for today to hear from executives of JPMorgan and Goldman Sachs.
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