President Barack Obama meets with former Federal Reserve chairman and current Economic Recovery Advisory Board chair Paul Volcker in the Oval Office, January 21, 2010.

US Regulation: White House adviser and former Federal Reserve chairman (1979-1987) Paul Volcker, will today present testimony to Congress on the measures which President Obama outlined last month to curb the risks taken by large banks. Last month, the President called his proposals under which commercial banks would be prohibited from owning hedge funds and limited in how much they could trade for their own account, the“Volcker Rule.”

Volcker is due to testify to the Senate Banking Committee today. He had opposed the repeal of the 1933 Glass-Steagal Act in 1999, which mandated the split of investment and commercial banking and resulted in the creation of groups such as Citigroup, which aspired to be a financial supermarket providing a wide range of services but ended up as a shopping mall with senior executives ignorant of the breakdown of the data behind the mega-figures on its balance sheet.

"I am not so naive as to think that all potential conflicts can or should be expunged from banking or other businesses," Volcker says in his prepared remarks according to Reuters.

"But neither am I so naive as to think that, even with the best efforts of boards and management, so-called Chinese walls can remain impermeable against the pressures to seek maximum profit and personal remuneration," he says.

Last December at The Wall Street Journal's Future of Finance conference, the 82-year old Paul Volcker made clear why he was opposed to a regulation-lite overhaul.

This is an excerpt of Volcker's discussion with The Wall Street Journal's Alan Murray.

ALAN MURRAY:Mr. Volcker, you have heard the reports from all four of these groups and you have heard the priorities that they have agreed on. We would love to hear your responses.

PAUL VOLCKER:Well, you are not going to be very happy with my response. I heard an awful lot of particulars here that I agree with to some degree, but my overall impression is that you have not come anywhere near close enough to responding with necessary vigor or structural changes to the crisis that we have had.

If it is really true that financial weaknesses brought us to the brink of a great depression that would have ended your livelihood and destroyed a lot of the global economy, then let me explain.

You concluded with financial-services executives showing cultural sensitivity and responsible leadership. Well, I have been around the financial markets for 60 years, and how many responsible financial leaders have we heard speaking against the huge compensation practices?

June 16, 1933: Washington, DC- President Franklin D. Roosevelt affixes his signature to the Glass-Steagall Bank Reform Act--deposit insurance measure, one of the last bits of legislation put through before Congress adjourned, at the end of the famous first 100 days of the Administration. Behind the President (l-r) are: Sen. Allen Barkley; Sen. Thomas Gore; Sen. Carter Glass; Comptroller of Currency J.F.T. Connors; Sen. William G. McAdoo; Rep. Henry S. Steagall; Senator Duncan U. Fletcher; Rep. Alan Goldsborough; and Rep. Robert Luce. In addition to deposit insurance, this second Glass-Steagall Act, separated investment banking and commercial banking, which is why Morgan Stanley and JP Morgan are two different firms. Commercial banks were seen as having taken on too much risk in share trading, with depositors' money, up to the October 1929 Crash. The Glass-Steagall Act was repealed by Congress in November 1999, a measure that has been termed the "Citigroup Authorization Act." Robert Rubin had pushed for repeal of the Glass-Steagall Act as Treasury Secretary. He resigned in July 1999 and was succeeded by Lawrence Summers, now President Obama's head of the National Economic Council. President Clinton called Rubin the "greatest Secretary of the Treasury since Alexander Hamilton" - - President George Washington's Treasury Secretary - - and the former Cabinet officer, who had spent 26 years at Goldman Sachs before joining the Clinton Administration, took a senior position at Citigroup. Rubin who earned $17.0 million at Citi in 2008, was not aware of the detail of $55 billion of collateralized debt obligations (CDOs) and other subprime-related securities on the group's balance sheet. "The answer is very simple," he told Fortune Magazine. "It didn't go on under my nose." The New York Times reported in November 2008 that in September 2007, Citigroup’s then chief executive, Chuck Prince, had learned for the first time that the bank owned about $43 billion in mortgage-related assets! On January 2, 2009, Citigroup said that Robert Rubin had resigned as a senior adviser and would not seek re-election as a board director. The Wall Street Journal says Rubin made $115 million in pay since 1999, excluding stock options. Rubin told the Journal his pay was justified and that there were higher-paying opportunities available to him. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said. Asked if he had any regrets, Rubin said: "I guess that I don't think of it quite that way," adding that "if you look back from now, there's an enormous amount that needs to be learned" - - Michael Hennigan - Finfacts Photo: © Bettmann/CORBIS

Every day I hear financial leaders saying that they are necessary and desirable, they are wonderful and they are God's work. Has there been one financial leader to stand out and say that maybe this is excessive and that maybe we should get together privately to think about some restraint?

I hear about these wonderful innovations in the financial markets, and they sure as hell need a lot of innovation. I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of?

You want boards of directors to be informed about all of these innovative new products and to understand them, but I do not know what boards of directors you are talking about. I have been on boards of directors, and the chance that they are going to understand these products that you are dishing out, or that you are going to want to explain it to them, quite frankly, is nil.

I mean: Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information. I am getting a bit wound up here.

MR. MURRAY:We are happy to have you. You are here to be wound up.

Do Innovations Do Much Good?

MR. VOLCKER:A few years ago I happened to be at a conference of business people, not financial people, and I was making a presentation. The conference was being addressed by a very vigorous young investment banker from London who was explaining to all these older executives how their companies would be dust if they did not realize the joys of financial innovation and financial engineering, and that they had better get with it.

I was listening to this, and I found myself sitting next to one of the inventors of financial engineering. I didn't know him, but I knew who he was and that he had won a Nobel Prize, and I nudged him and asked what all the financial engineering does for the economy and what it does for productivity.

Much to my surprise, he leaned over and whispered in my ear that it does nothing—and this was from a leader in the world of financial engineering. I asked him what it did do, and he said that it moves around the rents in the financial system—and besides, it's a lot of intellectual fun.

Now, I have no doubts that it moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.

How do I respond to a congressman who asks if the financial sector in the United States is so important that it generates 40% of all the profits in the country, 40%, after all of the bonuses and pay? Is it really a true reflection of the financial sector that it rose from 2½% of value added according to GNP numbers to 6½% in the last decade all of a sudden? Is that a reflection of all your financial innovation, or is it just a reflection of how much you pay? What about the effect of incentives on all our best young talent, particularly of a numerical kind, in the United States?

In Britain, I was just talking to a high-tech company about the immense attraction to go into finance when both Britain and the United States are suffering from a basic inability to produce things competitively, to keep up with the new economy. Is this a result of financial innovation that we should be really worried about?

Let us think about what structural changes are necessary to produce what is the heart of the problem, about too big to fail, moral hazard and the rest. As I say, I agree with many of your individual suggestions, but there were no suggestions in the area of moral hazard. It was suggested to improve regulation, and that may help, but having gone that far, it is better that you talk about some more serious structural changes.

I made a wiseacre remark that the most important financial innovation that I have seen the past 20 years is the automatic teller machine. That really helps people and prevents visits to the bank and is a real convenience.

How many other innovations can you tell me that have been as important to the individual as the automatic teller machine, which is in fact more of a mechanical innovation than a financial one?

In April 1998, the late renowned American columnist Molly Ivins wrote:"Anyone with any remaining doubts about how the world wags nowadays need only have read last week's headlines, in which two giant corporations, Citibank and the Travelers Group, calmly announced that they were running roughshod over the law. Further, they crooked a large corporate finger and summoned the Congress of the United States to fix it for them. "We want that law changed, boy. We want it changed now, and we want it changed to suit us, boy."

Paul Volcker, former chairman of the Federal Reserve, told The New York Times last week: 'Congress is under pressure to weaken our traditional barrier to combinations of commerce and banking, precisely the practice in Asia and elsewhere that we rail against as a major source of institutional weakness.'"

Molly Ivins concluded: "And all this is being done in your name, you lucky little consumer you. These big, big new banks say they just want to give you better service at a lower price.

The great thing about Americans is that we can be counted upon to greet this pious hypocrisy with the Bronx cheer it so richly deserves. The raspberries should be loud indeed in Florida, where NationsBank has been shutting down one branch bank after another since it bought Barnett Banks. Yes indeedy, fewer choices about where to bank certainly means lower fees for all of us — we can hardly wait.

Sure, go ahead, repeal the Glass-Steagall Act. We need a new world record for stupidity; the last one has been standing since 1981, when Congress passed the Garn-St. Germain bill deregulating the S&L industry, with the spectacular results we all remember so fondly."

Credit to Lawrence Kelly of Ann Arbor, Michigan for the Molly Ivins reference.