Looks like the core of it is a straight-up ban on proprietary trading, which Volcker is described as favoring in this October 2009 article.
[And not to nitpick but just to improve search efficiency for future cite seekers in this discussion, allow me to emphasize that the name is Volcker, not Volker.]
Having read some more about these proposals I have to retract that. Apparently there’s some serious question as to whether these proposals will significantly lessen the likelihood of this type of meltdown in the future. (For one thing, some of the most egregious players in the past meltdown are not to be regulated under these proposals.)
Jp Morgan is certainly not a traditional investment firm. Depending upon what metric you use, they’re either the largest or second largest commercial bank in the country. Also, Bear Stearns and Lehman no longer really exist, so I’d say that you completely struck out on trying to name examples of investment firms.
The governement hasn’t been left “holding the baby” when a bank fails. The FDIC guarantee is supported solely by fees assessed by banks. It truley is insurance. Now the FDIC does have the ability to borrow from the treasury, but that doesn’t mean that the FDIC doesn’t need to pay it back. And the way they will pay it back is with fees from the banks.
Also, I’m guessing you have no idea what the definition of risk is when you say a bank should not be taking risks. What the hell do you think making a loan is? Are you seriously saying that banks shouldn’t make loans? If you are seriously saying that a bank should just collect deposits and safeguard them until somebody wants to take their money back, then you are doing nothing more than turning them into safes. Further, there certainly wouldn’t be any interest paid on deposits in that case.
Why don’t you explain something to me. If banks immediately sold off the mortgages that they made and therefore it didn’t matter whether they were good or not, then why did Washington Mutual fail?
I wanted to read the President’s speech first, in detail, before I commented.
I think Mr. Obama is right on this one. Drawing a line between proprietary trading and commercial banking is a wise move. It’s self-evident (now, anyway) that permitting an insured banker to speculate with assets that will be replaced upon loss is to invite careless speculation.
Score one for the man from Chicago. Or Hawaii. Or even Kenya. 
I have the utmost respect for Paul Volker, the Fed Chairman that broke the back of inflation back in the 1980’s.
Seperating commerical and investment banking is a good thing. Glass Stegal 2.0 and I’m all for it.
BTW, I worked in derivatives in Tokyo and Hong Kong for Swiss Bank Corporation, Lehman Brothers and Nikko Securities.
Swiss Bank: Very strong risk controls and bought the very shit hot O’Connor partners. risk controls were so good they made a boatload of money in the Asian Crisis in 1997. In 1998, UBS essentially went bankrupt in the Russian Crisis, and the Swiss Government engineered the merger between Swiss Bank and UBS. UBS obviously got rid of the risk control people, and blew up spectacularly in last years meltdown. Ironically enough, Credit Suisse dodged the bullet even though they usually are the ones that take the fall.
Lehmans had pathetic risk control. Seriously. Saw this first hand in Hong Kong in 1996. A fixed income trader named Andre Lee built up all sorts of radioactive crap, left Lehman’s to join Peregrine. Later at Peregrine made the most reckless lending and trades and blew up spectacularly in the 1997 crash. Having come from Swiss Bank and the risk control environment, I raised some warning flags in 1996 ahead of the Asian crash and was told to “shut the fuck up and never raise this again.” The entire team was about building exotic derivatives based on Thai and other emerging market debt with 20x leverage on the upside and about 1,000x leverage on the downside (for the customer). Then then would sell these derivatives to the nascent Korean fund management industry and private investors. Other banks were doing the same. This was a huge contributor to the Asian crisis and led to the bankrupting of most of Asia.
Nikko Securities, #3 of the Big 4 in Japan, also had weak controls. I was on the equity derivatives desk as a salesman when the 1997 crash hit. We were a small trading book and had about USD75M in capital for proprietary trading, some structured products and small client flow. We lost about 50% of the value of our trading book in 30 minutes after the market opened. I remember the Japanese leader came over at about 45 minutes and asked the head trader Nick, who was an old school seat of the pants trader with balls of steel. Nick said “we took a hit but not too bad.” About 60 minutes into the market, all of Asia was in a freefall with virtually zero volume. Nick turned to his other trader, who alternately worked as a bookie for horse racing, and said “let’s trade our way out of this.” 48 hours later they had made back the losses. They bet big on the dead elephant bounce that hit the US on day 2.
that’s the trading mentality. It’s not my money and there are many times a year I can only make my bonus or not be fired by betting the ranch. When you got rid of the partnership system at Goldman and other places, the vested wealth of the partners made for natural risk control (didn’t always work but worked better than what came later).
Those ex Lehman Brothers guys from last year? The ones I know in Asia, that are now part of Nomura Securities, are the most motivated hungry guys on the street. Most lost virtually everything and went from being millionaires to unemployable anywhere else almost overnight. They have exactly one chance to become millionaires again, and that’s by trading and taking as much risk as they can and getting a couple of good bonuses.
We need Glass Stegal 2.0 pretty desperately.
Because they didn’t sell off their mortgages, unlike most banks. So when the housing market collapsed, they collapsed with it partly due to what the other banks did! (And granted partly cause WaMu’s skill in making safe loans was slightly below average from what I hear so dont quote me on that.)
I generally support the move by Obama, although I think the devil will be in the details.
It would have been great if every insolvent bank or investment bank had been put through the FDIC process, but that’s not what happened. Instead the government bailed out the country’s biggest financial institutions by guaranteeing trillions of dollars of their assets.
And banks like Citi weren’t using their deposits to make loans, they were using them as seed money to make massive leveraged bets in various capital markets, something that turned out to be a little bit too risky.
Yes indeed Fanny created bad mortgages Oh wait, they did not. They guaranteed mortgages. You can not take the responsibility from where it belongs. banks, bad banking practices, swaps and mortgage reselling with no backing. That belongs to the financial companies alone. If they sold honest mortgages and retained a reasonable percentage ,the economy would not have tanked.
Why would an investment bank go through the FDIC process? That makes no sense. Also, insolvent banks, with the possible exception of too big to fail banks, never received any TARP funds. That would be the reason for the large number of bank failures. For the most part, the banks that received TARP funds were healthy banks. That would be the reason that within approximately one year, more than half of the funds were paid back not even including dividends received or proceeds from the sale of warrants. Finally, how about providing a cite for the government guaranteeing trillions of dollars of banks’ assets.
As of 9/30/08, prior to receiving TARP funds, Citi had total consumer and corporate loans of $762 billion and total deposits of $826 billion. You were saying?
I’m not completely opposed to reinstating Glass Steagal, but you do realize that it would have had no effect on any of the companies mentioned in your post, right?
That’s sort of my point. Stating that all banks immediately sold off the home mortgage loans that they made is simply not true. Further, in many cases, the ones that were sold, were sold to other banks. It might be worth looking at the largest failures in 2008 and 2009 such as Washington Mutual, IndyMac, Colonial, Guaranty, and Bank United. Each of these banks either held on to mortgages they wrote or bought other banks’ mortgages.
Did he not sign the bill giving the banks the money they desperately wanted? Maybe he should have added some stipulations.
Acording to the FT
Not very promising.
- Because FDIC have the only people in government experienced at breaking up banks, clearing up the debt and reselling the cleaned-up bank or the sellable assets of the bank onto new investors. Somebody has to do it, or at least somebody should have done it, we only needed to bail out the system not the banks as well. The big banks were all insolvent and they got TARP funds along with bailouts from various other alphabet soup programs.
Here’s a cite for you:
• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion
TOTAL: $3.92 trillion
PLUS
World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion
Total cost : $7.52 trillion.
Nov. 24 2008 (Bloomberg) – The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the [TARP](http://www.saddoboxing.com/boxingforum/redirect-to/?redirect=http%3A%2F%2Fwww.ustreas.gov%2Fpress%2Freleases%2Fhp1207.htm) on Oct. 3, Fed Chairman [Ben S. Bernanke](http://www.saddoboxing.com/boxingforum/redirect-to/?redirect=http%3A%2F%2Fsearch.bloomberg.com%2Fsearch%3Fq%3DBen%250AS.%2BBernanke%26site%3Dwnews%26client%3Dwnews%26proxystylesheet%3Dwnews%26output%3Dxml_no_dtd%26ie%3DUTF-8%26oe%3DUTF-8%26filter%3Dp%26getfields%3Dwnnis%26sort%3Ddate%3AD%3AS%3Ad1) and Treasury Secretary [Henry Paulson](http://www.saddoboxing.com/boxingforum/redirect-to/?redirect=http%3A%2F%2Fsearch.bloomberg.com%2Fsearch%3Fq%3DHenry%2BPaulson%26site%3Dwnews%26client%3Dwnews%26proxystylesheet%3Dwnews%26output%3Dxml_no_dtd%26ie%3DUTF-8%26oe%3DUTF-8%26filter%3Dp%26getfields%3Dwnnis%26sort%3Ddate%3AD%3AS%3Ad1) acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
Bloomberg Politics - Bloomberg
- Yeah, that’s the conventional banking part of Citi. Then there’s the investment part of Citi, which is the one that lost most of the money making massive leveraged bets .
The purpose of the FDIC is to protect depositors. If there aren’t any depositors, and the financial institution is not a part of the FDIC insurance program, then the FDIC has no role to play. The proper place for investment banks is bankruptcy court.
Right. I asked for a cite for the government guaranteeing trillions of dollars of banks’ assets, which was your claim. You instead show a cite talking about the Fed’s increased lending. First of all, a loan backed by collateral is not remotely close to a guarantee of assets. Second, the Fed was lending to more than just banks. Third, I agree with the idea that the Fed should be audited. This cite doesn’t say what you think it does.
Right. Of course I was responding to your statement that Citibank doesn’t use deposits to make loans. I think it is pretty clear that that is exactly what they do with their deposits. Maybe you should pay more attention to what you write. My response directly refutes your statement without making any statement on whether they have other operations that lost money.
If by “he”, you mean Obama, then no. TARP was put in place under Bush although Obama was in favor of it.
I’d like to preface this by saying that I’m a pretty ardent Obama supporter. I worked for the guy in two states and what not.
At face value, I have a hard time with the government telling businesses how they’re run. However, it was these businesses that put the country’s economy at peril precisely because they actively crusaded against regulation.
With that being said, let’s get actual, meaningful regulations that can get this crap under control. Yes. It’s a fine line to walk, with enough regulation versus too much and growth versus stagnation. However, good legislation can and does walk that line. The devil will be in the details, and I sure as hell hope the devil gets exorcised, though.