Volcker pitches bank risk-taking rules to Congress

Former Federal Reserve Chairman Paul Volcker made a personal pitch Tuesday for the Obama administration’s new proposal to sharply limit risks taken by the nation’s largest banks, using his status as a financial sage to try to counter skepticism from key senators.

Several Republicans on the Senate Banking Committee said the regulations would not have prevented such high-profile financial industry collapses as insurer American International Group Inc. and investment banker Lehman Bros. Holdings Inc.

But Volcker said the restriction on risk-taking by banks that he has been advocating for months -- leading President Obama to dub it “the Volcker Rule” -- is designed as much to prevent future crises as to address problems that arose during the last one.

“I tell you sure as I’m sitting here that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back to haunt you,” said Volcker, 82, who headed the Federal Reserve from 1979 to 1987.

Volcker gained “wise man” status in the financial world because of his successful battle against inflation during his tenure as Fed chairman and his current role as head of the president’s Economic Recovery Advisory Board.

Even so, Volcker was unable to get his proposed restrictions included in the sweeping Obama financial regulatory overhaul plan introduced last summer.

But Obama has taken a more populist tone with large Wall Street firms in recent weeks. With the former Fed chairman at his side, the president unveiled the Volcker Rule on Jan. 21 with a warning that banks no longer could take all the upside of risky investments and leave taxpayers footing the bill if those bets fail.

The move complicates delicate negotiations by Democrats and Republicans on the committee to craft a bipartisan financial regulatory bill that could move through the polarized Senate. Among the problems was the timing of the announcement -- less than two days after Republican Scott Brown won the Massachusetts Senate race.

“It seemed to many to be transparently political,” said committee Chairman Christopher J. Dodd (D-Conn.), who added that he didn’t think that was the case. But he cautioned the administration that the new proposal is “adding to the problems of getting a bill through.”

Volcker, noting that Obama decided on the proposal weeks ago, said it was important to get the financial regulatory overhaul right because it could be years before there is another chance. Large banks oppose the plan and have increased their lobbying.

But a clearly annoyed Dodd told Volcker and Deputy Treasury Secretary Neal Wolin, who also testified Tuesday, that “you can’t add something every day.”

The proposal advocated by Volcker attempts to limit risk-taking by banks that hold federally insured deposits and have access to other government programs, such as low-interest loans from the Federal Reserve.

Under the plan, financial institutions with commercial banking units would be prohibited from owning or investing in securities operations that benefit only themselves.

They would be barred from owning or investing in hedge funds or private equity funds. The firms would be able to trade on behalf of their customers but would not be able to trade simply for the firm’s benefit, a practice known as proprietary trading.

Those banks could choose to continue those activities but would have to give up their commercial banking operations, which are supported by government programs that reduce the costs of obtaining money.

“We don’t have to protect speculative activities,” Volcker said. “Curbing the proprietary interests of commercial banks is in the interest of fair and open competition.”

Dodd said Tuesday that he supported the concept of the Volcker Rule but questioned whether lawmakers could “cleanly separate” the investments banks make to hedge against losses by their customers from profit-making trades.

Republicans were more skeptical. Sen. Richard Shelby (R-Ala.) said he was disturbed that the new proposal suddenly was “air-dropped” into the bipartisan negotiations over a Senate regulatory overhaul bill.

“I hope this is not an indication the administration plans to substitute thoughtful analysis with whatever polls well on a given day,” he said.

The House passed a comprehensive bill in December that would make the biggest changes in financial regulations since the Great Depression, including granting the government new authority to seize and dismantle large financial firms if their failure posed a major risk to the economy, to preemptively break up such firms if they’re deemed to be too large, and to create an agency to protect consumers in the financial marketplace.

Shelby echoed several other senators in saying that although commercial banks engaged in investment banking activities, there was “no evidence that I’ve seen that proprietary trading created the losses that caused the need for bailouts.”

But Volcker said he wanted to help get speculative activity out of the commercial banking system.

“I don’t want my taxpayer money going to support somebody’s proprietary trading,” Volcker said.

When Sen. Mike Johanns (R-Neb.) said the restriction wouldn’t have stopped AIG’s risky behavior, Volcker stressed it is only part of the regulatory overhaul.

“The Volcker Rule, as much as I would like to say it would solve all problems, will not solve all problems,” he said.