Paul Volcker, Chair of the President's Economic Recovery Advisory Board, speaks to colleagues during a lunch address at the Center on Capitalism and Society at Columbia University 6th Annual Conference on Emerging from the Financial Crisis Friday, Feb. 20, 2009, in New York.
This is an exclusive article for Quant Network by William Cohan. All Rights Reserved.
William D. Cohan, a former senior Wall Street investment banker, is the bestselling author of 2007 Business Book of the Year Award’s “The Last Tycoons: The Secret History of Lazard Freres & Co.” and “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street” (March 09, paperback available next week). He writes for The Financial Times, Fortune, the New York Times, the Washington Post, the Daily Beast, and appears frequently on CNBC.
What happened to Paul Volcker?
One minute the 82-year-old former Fed Chairman is holing up in his New York office on the outs with his boss, President Obama, and yet is still making lots of sense about how to reform Wall Street. The next minute, Volcker is marrying his long-term office manager, Obama is naming financial reform proposals after him – the so-called Volcker Rule – and all his good ideas and wisdom about Wall Street reform seemed to disappear. It’s as if the closer Volcker got to Obama’s side after a year in exile, the more foolish his thinking became.
For instance, last December 12, speaking in Berlin, of all places — when he was still in political Siberia – Volcker waxed eloquent about what should be done to rein in Wall Street’s culture of excessive risk-taking and excessive rewards. Volcker decried the “temptation” at some Wall Street firms to return to the risk-taking practices that enabled them to pay large bonuses. “It’s natural, you like to return to normalcy, make some money and get on with it,” he said. But, he concluded, “I’m very interested in using this crisis as a way to avoid the next one. This isn’t any time to go back to business as usual.” This is very clear-headed thinking.
On January 14, 2010, still on the outs, Volcker spoke before the Economic Club of New York. “[S]ome market participants just possibly including some in this room, seem to be suggesting that the events of the past couple of years are like a bad dream,” he said. “A truly unsettling bad dream, but nonetheless something that in the cold light of day need not require a really substantial change in the structure of markets or in corporate lifestyles. Better board oversight, the tightening of institutional risk management practices, more adequate capital and equity standards, better informed and able regulators, a review of credit rating practices, certainly more sensible than uniform accounting standards, the sort of things I characterize as reform lite should be adequate to do the job.
“But surely the need is more fundamental,” he continued. “This latest crisis has been cited as a once in a century phenomenon, but do not forget it is only the latest in a string of crises over the past 30 years that seem to be growing in both frequency and intensity. Even more significant today, the forceful official responses were necessarily undertaken in the white heat of crisis without the luxury of time or the benefit of established emergency procedures and financial resources. So we’re left with a residue — a residue of really fundamental questions about the appropriate role of government in rescuing failing institutions and markets. The old questions colloquially described as ‘too big to fail’ loom larger than ever on the agenda.” Again, Volcker made great sense about the fundamental reforms that were required on Wall Street.
Then, five days later, Republican Scott Brown won Ted Kennedy’s U.S. Senate seat in Massachusetts, causing Obama to lose his sixty-seat Senate majority and all hell to break loose. The following day, January 20, Volcker suddenly found himself at Obama’s side in the White House, talking up the inane Volcker Rule — whereby banks such as JPMorgan Chase and Bank of America, which take customer deposits (but not Goldman Sachs, which does not), would be barred from proprietary trading, or from owning hedge funds or private equity funds.
Had Volcker lost his mind? Surely he knew that the current financial crisis was not caused by Wall Street’s proprietary trading nor by its private equity funds nor by a hedge fund owned in whole or in part by a depository institution. True, while his previous speeches in 2009 had occasionally included the idea of barring commercial banks from these supposed risk-taking activities, no one took this seriously, especially since neither Obama nor Congress did.
Then, on January 30, ten days after his political resurrection, Volcker weighed in with a lengthy New York Times opinion piece. Now fully on the team, Volcker seemed to be off the reservation. His clear thinking and lucid arguments had evaporated like rain in the Sahara, and his writing – if it even was his – had lost all its verve and urgency. “I am well aware that there are interested parties that long to return to ‘business as usual,’ even while retaining the comfort of remaining within the confines of the official safety net,” he wrote, in about the best he could muster. “They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks. In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.” Blah, blah, blah.
While what happened to the real Paul Volcker ever since January 19 remains a mystery, we can still invoke his once-powerful spirit. Until Wall Street’s executives – the ones who make the decisions about what businesses to be in and how to deploy capital – once again have their entire net-worths on the line (as they did when Wall Street firms were uniformly private partnerships), there will be no meaningful change on Wall Street, just an endless series of meanderings until the next crisis hits. Call that the Cohan Rule, if you like.
Tags: fed, paul volcker, president obama, wall street reform, william cohan
Congratulations on a very good article. I found Volcker to be contradicting as well.
And of course he was the brain behind the idea with proprietary trading restriction …