The elder statesmen of the financial sector — like George Soros, Nicholas F. Brady, John S. Reed, William H. Donaldson and John C. Bogle — don’t think of themselves as angry Main Streeters. They grew quite wealthy in finance, typically making their fortunes in the ’70s and ’80s when banks and securities firms were considerably more regulated. And now, parting company with the current chieftains, they want more rules.
Paul Volker
While the younger generation, led by Lloyd C. Blankfein, chief executive of Goldman Sachs, lobbies Congress against such regulation, their elders support the reform proposed by Paul A. Volcker and, surprisingly, even more restrictions.
Volcker, 82, signed up the support of nearly a dozen peers whose average age is north of 70 and whose pedigrees on Wall Street and in banking are impeccable. But while Volcker focuses on a rule that would henceforth prohibit a bank that takes deposits from also buying and selling securities for its own account — risking losses in the process — most of his prominent supporters see that as a starting point in a broader return to regulation.
Nicholas Brady, a Treasury secretary in the late 1980s and early 1990s said, “if you wish the government to guarantee your deposits and bail you out if necessary, then you can’t be involved in speculative activity.”
Brady argues in effect that the current generation of bankers is so profit-oriented, it might well find a way to convert trading for a customer into surreptitiously trading for the bank itself, risking depositors’ money in the process.
Nor does it bother John S. Reed, a former Citigroup co-chairman, said, “I can be convinced that we should move back in the direction of Glass-Steagall.”
Reed wonders if a trading operation should even exist under the same roof as a standard commercial bank. The traders make more in salary and bonuses than the bank employees, and there are frictions. “The bank people say ‘if the capital market guys take big risks, why can’t we do so too and earn the same bucks?’” Reed said. “They start trying to do things that make them look good, like making risky commercial loans and driving for volume.”
The Volcker Rule would solve this in part by telling “the capital market guys,” as Reed put it, that they can trade only as agents for customers and not on behalf of the house. Restricted to serving only customers, they might or might not take fewer risks.
In any event, the restriction goes in the right direction, which is why George Soros, the billionaire trader, endorses it and falls into place as one of Volcker’s supportive elder statesmen, referring to him as “an extraordinary public servant.”
But the Volcker Rule is not enough, Soros said. A company like Goldman Sachs, barred from proprietary trading, would probably give up its status as a bank holding company and revert to its role as a big Wall Street investment house, free to trade as it wished. If it then failed, Volcker would use the federal government to usher it through an orderly liquidation. Soros, in contrast, would rescue Goldman Sachs.
“The danger is that Congress and the administration may try to hide behind the banner of Volcker’s reputation, enact this one dimension of reform and nothing more, and pretend that it is sufficient to repair the financial system,” Soros said. “That would be a dangerous mistake.”
At 79, Soros says, he has watched Goldman Sachs, and other firms like it on Wall Street, grow too big to fail, which means that no administration could allow such giants to go through Volcker’s orderly liquidation and disappear. That would be too damaging to the financial system, the economy and the political party in power.
“You have to recognize that they enjoy an implicit guarantee,” he said of the big trading houses. “To pretend they will be allowed to fail is not credible.”
The solution for Soros is to avoid failure in the first place. The big Wall Street firms “would have to be closely regulated to make sure they don’t fail,” he said. “You may decide to break them up, or restrict the number of markets in which they are allowed to operate and you would need to impose capital requirements” to curtail risk-taking.
Derivatives contracts are a major source of risk, and Soros would limit their use. These contracts — offering insurance, for example, on trading positions — are still ubiquitous. When they come due in great quantities, as they were about to do in the fall of 2008, the contagion spreads, undermining one financial institution after another.
Source: New York Times
