Money & Company

Tracking the market and economic trends
that shape your finances.

« Previous Post | Money & Company Home | Next Post »

Volcker: Time to curb big banks' high-risk trading

September 16, 2009 |  3:23 pm

Former Federal Reserve Chairman Paul Volcker today reiterated his call for the government to restrict the nation’s mega-banks from risky trading activities with their own capital.

That idea is bound to aggravate the banks, which can profit mightily by trading in hot markets -- like this year’s rebounding stock and bond markets.

Volcker, a top economic advisor to President Obama, told an Assn. for Corporate Growth conference in Los Angeles: "I do not think it reasonable that public money -- taxpayer money -- be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization."

Exactly right, most taxpayers probably would say. But how do we get that genie back into the bottle?

More from Bloomberg News:

Volcker renewed his call for a limit on the activities of banks that are considered "too big to fail."

Volcker Since January, Volcker has advocated that regulators should prohibit financial companies whose collapse would pose a risk to the economy -- those considered too big to fail -- from engaging in certain types of trading and investing activities.

"Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking," Volcker said.

"I want to question any presumption that the federal safety net, and financial support, will be extended beyond the traditional commercial banking community," he said.

The Wall Street Journal wondered whether Volcker’s proposal was at odds with the Obama administration’s less onerous ideas for tightening regulation of banks. From the Journal:

Asked after his speech if his comments represented a break with the White House's proposal, [Volcker] replied: "Nothing I said today should be a surprise" to the administration.

The Journal said Volcker would ban banks from "sponsoring and capitalizing" hedge funds and private-equity firms, and that he called for "particularly strict supervision" of trading they do in securities and derivatives for their own accounts.

-- Tom Petruno

Photo: Paul Volcker. Credit: Joshua Roberts / Bloomberg News