President Barack Obama meets with Paul Volcker, Economic Recovery Advisory Board chair in the Oval Office January 21, 2010. Paul Volcker (age 86) was chairman of the Federal Reserve under presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987.|
Dr Peter Morici: US regulators
are finally implementing the Volcker Rule, and it may prove the hidden jewel in
the Dodd-Frank financial reforms.
The rule limits
bank purchases of stocks, bonds, currency, commodities, and
derivatives—contracts that bet on movements in the prices of assets—with their
own money, which also put their federally insured deposits at risk.
behemoths like JP Morgan Chase earn huge profits from such proprietary trading.
Those help pay huge bonuses for traders but also create great jobs for many
ordinary Americans. Unfortunately, trading distracts attention from the ordinary
business of taking deposits and lending money to small businesses and
reasonable. Encourage banks to be banks, again, by pushing them toward lending
by prohibiting trading—essentially making bets with deposits that are ultimately
guaranteed by taxpayers.
the financial crisis, securities trading did not get the big Wall Street banks
in trouble. It fact, the profits from trading kept many solvent when mortgages
failed, and later when they paid big fines for misrepresenting mortgages sold to
Prior to the
crisis, banks across the country made loans to finance homes buyers could not
afford, and then bundled mortgages into bonds to sell to pension funds,
insurance companies and other investors. When the latter figured out many loans
would fail, banks got stuck holding too many bad loans and mortgage backed
mortgages failed, foreclosures snowballed and housing prices collapsed.
arrangements—like buying and selling derivatives intended to insure against too
many mortgages failing contributed mightily to the morass—but it wasn’t JP
Morgan trading in foreign exchange or Goldman buying and selling aluminum
futures that caused the collapse. In
fact, that trading stayed profitable for even Citigroup, which headed the list
of basket-case banks Uncle Sam had to rescue.
Today’s big Wall
Street banks are not your grandfather’s banks. They are financial conglomerates
that are both old fashioned commercial banks, and investment banks that help
corporations sell new stock and bonds; brokerage houses that help the little guy
invest; wealth managers for the portfolios of families rich enough to be
corporations; and create markets in municipal bonds, foreign exchange, and other
assets where no large public market exists or is sufficient.
bankers learn a lot from those activities, and often buy and sell assets with
their own money to profit. That makes markets function better and is a source of
profits so huge they don’t have enough interest in making loans, especially to
Dodd Frank put such onerous and costly restrictions on ordinary bank lending
that small town and regional banks have been selling out to larger brethren, and
a handful of large big city financial conglomerates now control more than half
of all U.S. bank deposits. As a result many smaller businesses around the
country have lost their traditional sources of bank credit, hampering their
ability to invest and create jobs.
Before the 1933
Glass-Steagall Act was repealed by Congress and President Clinton, investment
banking and similar financial activities were kept separate from federally
insured commercial banking. And that’s what needs to happen again, and the
Volcker Rule could motivate just that.
As difficult as
it may be for Jamie Dimon, CEO of JP Morgan Chase, to accept, now that the
Volcker Rule makes it illegal for entities owning a commercial bank to engage in
proprietary trading, it may be the best business decision for his firm to spin
off its bank.
Chase Bank can
stand on its own—and would better serve the economy as a bank focused on taking
deposits, making loans and offering a range of consumer financial services—life
insurance, retail brokerage services and trust activities.
Let JP Morgan be
independent and wheel and deal—and in the process create wealth and jobs like
few businesses, other than those in Hollywood and the Silicon Valley, can—but
not with a government guarantee of its solvency. If it gets in over its head—let
Trading may be a
bit like gambling but a bit of Las Vegas on the Hudson is good for America.
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone
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