Volcker urges Senators to adopt Obama's rules on banking
Wednesday, February 3, 2010
Former Federal Reserve chairman Paul Volcker urged a Senate panel Tuesday to adopt new rules that would limit the investment activities of large banks as part of an overhaul of financial regulations, but lawmakers said the proposal could complicate ongoing negotiations on sweeping reform legislation.
Volcker told members of the Senate Banking Committee that he supports government safety nets, such as deposit insurance for commercial banks, but that taxpayers should not be on the hook for risky practices that aren't aimed directly at helping a firm's customers.
"There is not . . . a similar rationale for public funds -- taxpayer funds -- protecting and supporting essentially proprietary and speculative activities," Volcker said.
Backed by Volcker, President Obama proposed the new rules last month in an effort to restrict banks from making speculative investments using their own capital -- an activity known as proprietary trading -- and from owning a hedge fund or private equity fund.
Although receptive to the overall merits of the proposal, Banking Committee Chairman Christopher J. Dodd (D-Conn.) said that Congress had already spent months hashing out the details of regulatory reform and that the new proposals were "adding to the problems of trying to get a bill done."
"There are tipping points. There's only so much that this institution will tolerate at a given point in time," Dodd said. "I don't want to be in a position where we end up doing nothing because we tried to do too much at a critical moment."
Volcker has long said that speculative activity contributed to the financial crisis and that banks, which benefit from government efforts to encourage lending, should be prevented from taking advantage of that safety net to make risky investments.
During the hearing, Volcker and Neal Wolin, deputy Treasury secretary, said the new proposals represented a key part of wide-ranging financial reform.
"The goals of financial reform are simple," Wolin said. "To make the markets for consumers and investors fair and efficient, to lay the foundation for a safer, more stable financial system less prone to panic and crisis, to safeguard American taxpayers from bearing the risk that ought to be borne by shareholders and creditors, and to end once and for all the dangerous perception that any financial institution is too big to fail."
But ranking Republican Sen. Richard C. Shelby (R-Ala.) was less enthusiastic and said he was "quite disturbed" that "this concept that we have before us today was airdropped into the debate."
During the hearing, he said that he was "willing to consider any proposal that will strengthen our regulatory framework and help our economy." But in a TV interview afterward with CNBC, he made clear his view that the so-called Volcker Rule could potentially harm financial institutions.
The committee is scheduled to hold a second hearing on the proposals Thursday, with testimony from Goldman Sachs managing director E. Gerald Corrigan and economist Simon Johnson, among others.