One man we should all be paying attention to is Paul Volcker:http://www.bloomberg.com/apps/news?pid= ... BbIcvSgrFs
Now, as Obama’s inside outsider, he’s trying to maintain his balance amid conflicting political agendas. In February, he complained to administration officials and friends about being kept away from policy discussions. While he’s happier now, he’s still worried that he won’t have enough impact on the regulatory reforms he cares about most, the friends say.
In May, Geithner announced plans to regulate derivatives trading, which would require most of it to move through a clearinghouse and, in theory, reduce the risk that a trader’s collapse could send shock waves through the market. While the proposal includes many of the suggestions Volcker laid out in a Jan. 15 report by the Group of 30 that he helped write, it doesn’t go all the way. Volcker chairs the board of the G-30, which includes former central bank chiefs and economic officials from around the world.
The Geithner plan allows contracts that can’t be standardized to be traded outside the central clearinghouse. Volcker wants to discourage that by imposing capital requirements on trading parties, people familiar with his thinking say. He also wants derivatives to be traded on exchanges, where investors can see prices for themselves, which would bring down profits for the dealers who act as intermediaries.
Geithner’s plan leaves the door open for more-onerous capital demands and a bigger role for exchanges. Wall Street banks, including JPMorgan Chase & Co. and Goldman Sachs, sent a letter to the New York Fed on June 2 supporting a clearinghouse.
Volcker has long been suspicious of financial products that most people can’t understand. One of his four grandchildren, Colin Zima, heard about it a lot when he studied financial engineering.
“He would constantly joke about me studying to be a crook,” says Zima, 25, who worked at UBS for a year before taking a job in 2007 as a statistician at Google Inc. in San Francisco.
The new job made his grandfather happier, he says.
The former Fed chairman started worrying about derivatives and structured debt such as mortgage-backed bonds in the early 2000s, his grandson says. In a 2000 interview with the New York Times, Volcker said he couldn’t make sense of the financial innovation going on.
“You obviously have a kind of speculative fever,” he told the paper. “It’s a kind of casino. It’s all the rage, trading certificates that have no intrinsic value.”
In 2005, Volcker was worried about the housing bubble, the U.S.’s growing trade deficit and banks’ increased risk taking.
“Under the placid surface, there are disturbing trends,” Volcker wrote in the Washington Post. “Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.”
The Obama administration initially wanted to give the Fed a larger role, people close to the discussions say. Volcker was opposed, arguing that too much weight on the institution could threaten its independence in setting monetary policy.
“Do we want to make the Federal Reserve the chief regulator too?” Volcker asked during a Bloomberg TV interview on April 29. “Maybe that’s going a little too far.”
The administration has since shifted away from having a single regulator, instead giving the Fed a partial role in monitoring systemic risk, along with a council of regulators.
Volcker’s concern about an overstretched Fed has shaped the views of key congressmen, aides on Capitol Hill say. House Financial Services Committee Chairman Barney Frank echoed Volcker’s views on regulatory oversight on May 28, saying he opposed a single regulator.
“My own preference is for a dual-track regulation,” Frank said, referring to two separate channels of regulation that would focus on the health of the banks and the need to monitor for systemic risk as suggested by Volcker’s G-30 report.
The PERAB is taking a broad look at financial reforms, including whether banks that take deposits should be barred from engaging in high-risk trading, according to some members. While Volcker has strong views on that -- he thinks commercial banks should be prohibited from owning hedge funds or private equity units, people familiar with his thinking say -- he’s listening to others in the group.
“We’re an advisory board, so we can present different viewpoints at the end to the president,” says board member Wolf.
The biggest obstacle to Volcker’s reform agenda is Summers, Volcker’s friends say. While the president’s top economic adviser has softened his anti-regulatory stance from his days as Clinton’s Treasury secretary, it will be difficult for him to accept some of Volcker’s proposals, they say.
That hasn’t fazed Volcker.
“If he’s of a different view, I’m sure he’ll recognize the wisdom of my view sooner or later,” Volcker said in the April interview.
“Don’t rule Volcker out yet,” says Kavesh, his longtime friend. “Paul worked under five presidents before, and he knows how to play the political games. As events unfold, he’ll take on a more direct, stronger role.”