Wall Street & Markets

Paul Volcker really not so hot on Glass-Steagall

By Justin Fox | November 2, 2009 | +

The FT’s John Gapper heard Paul Volcker speak about financial regulation in Florida today:

[H]e emphasised this afternoon that he was “not proposing a return to Glass-Steagall” because he regarded securities underwriting as “a reasonable banking function analogous to lending”. Nor did he want to bar banks from mergers and acquisitions advice.

The only activities he believed should be split out by legislation or regulation from commercial banks were hedge fund and private equity fund management and proprietary trading. Banks should be able to do “whatever Goldman Sachs and Morgan Stanley did in 1980″.

That’s an interesting way of putting it, but I’m not sure where it gets us. It’s my understanding that most of the trading risk that Wall Street firms take on is in the course of trading for clients, not proprietary trading. And it was underwriting of mortgage securities (or mortgage CDOs, if you can call those securities) that got Citigroup, Merrill Lynch and others into so much trouble.

Not that I have a better idea for where to draw the dividing line, if there is to be a dividing line. Do you?

Related Topics: Glass-Steagall, Paul Volcker, Wall Street & Markets

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  • pneogy

    “Not that I have a better idea for where to draw the dividing line, if there is to be a dividing line. Do you?”

    Yes. Go back to Glass-Steagall. It worked fine till Gramm-Leach-Bliley messed things up in 1999.

  • strawmn

    I gotta agree with pneogy. I thought it was around here that someone pointed out that crude, but effective, measures of regulation are better than no regulation at all.

    To the best of my knowledge, opposition to Glass-Steagall revolves around a) the argument that it retards growth, and b) that it would be ineffective at preventing the crisis that occurred.

    Personally, I think that a measure that makes it more difficult to grow larger, that raises barriers to mergers, that prevents more complex large financial institutions from forming, is probably a good thing. But I get it that others won’t agree.

    And maybe Glass-Steagall wouldn’t have prevented the bubble, but limiting the scope and size of financial intermedaries is a big step back from the ‘too-big-to-fail’ problem. At least you’ve broken the conventional lending sector apart from the investment banks, which makes the problem more manageable.

    On the other hand, LCTM crashed pretty spectacularly without any conventional operations at all, so I guess that’s a big giant hole in my argument.

  • waltwriston

    Glass- Steagall was whittled away bit by bit during the 80’s by Volcker with the ultimate culmination coming under John Reed with the merger of Citicorp and Travelers (now spin-off), and now it seems Volcker is out to put regulations on mutual probably because of what’s known as “financial disintermediation,” in other words, taken profitable business from the money centered banks. I suspect Citigroup is planning to unwinding its operations and “take the money and run” right after they do their reverse split.

    Just speaking as a Concerned holder of C.

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