Bill Moyers
April 5, 2012
Paul Volcker on the Volcker Rule

BILL MOYERS: Welcome. Well here we go again. The old game of congressional creep. After months of haggling and debate, Congress finally passes reform legislation to fix a serious rupture in the body politic. The president signs it into law, but then we discover the fight’s just begun, because the special interests immediately set out to win back what they lost when the reform became law. They spread money like manure on the campaign trails of key members of Congress. They unleash hordes of lobbyists on Capitol Hill, cozy up to columnists and editorial writers, spend millions on lawyers who try to rewrite or water down the regulations required for enforcement. And before you know it, what once was an attempt at genuine reform creeps back towards business as usual.

It’s happening right now with the Dodd-Frank Wall Street reform and Consumer Protection Act -- passed two years ago in the wake of our disastrous financial meltdown. Especially vulnerable is a key provision of Dodd-Frank known as the Volcker rule -- an attempt to keep the banks in which you deposit your money from gambling your savings on the bank’s own, sometimes very risky investments. It will come as no surprise that the financial industry hates the Volcker rule and is fighting back hard.

Just look at these headlines:

“Bank Lobby’s Onslaught Shifts Debate on Volcker Rule.” “Big Banks are Winning on Volcker.” “Lawmakers Pushing for Weaker Volcker Rule Reap Wall Street Cash.” “Banks Act to Skirt Volcker Rule on High-Risk Trades.”

According to Bloomberg News, the financial industry’s success “demonstrates that four years after Wall Street helped cause the worst economic downturn since the Great Depression and prompted a $700 billion taxpayer bailout, its lobby is regaining its power to blunt or deflect efforts to rein in the banks.” Those are discouraging words. So to find out more about what’s going on, I thought, why not go right to the source, the man after whom the Volcker rule was named. Educated at Princeton, Harvard and the London School of Economics, Paul Volcker has been a formidable figure in government for more than 30 years, serving two terms as chairman of the Federal Reserve from 1979 to 1987.

He’s also advised the U.N and the World Bank, he headed President Obama's Economic Recovery Advisory Board. Paul Volcker, welcome to the show.

PAUL VOLCKER: Thank you.

BILL MOYERS: These headlines and many others suggest that they're going to win this one. That they're going to get a weaker Volcker Rule.

PAUL VOLCKER: I think there's a certain amount of confusion here. A lot of the criticism is over the complexity of the thing and, essentially it's down to a lot of details. But the basic rule, of course, is incorporated in the law. And I think when you get all finished with this Sturm und Drang in the Congress now, I think you're going to have a reasonable interpretation of a law and an interpretation that can be reasonably followed by the banks and enforced by the regulators.

BILL MOYERS: In laymen's language what does the Volker Rule stop the banks from doing?

PAUL VOLCKER: Stops them from doing speculative trading. And when I talk to your people on the street in New York or have a reading and make a speech and I say, “You know, is it appropriate to have a rule that banks that are protected by the U.S. government should engage in speculative trading? I'm-- when they're effectively subsidized? Using your deposits to go speculate?” And they all cheer and say, “Of course not.”


PAUL VOLCKER: I mean it's just kind of common sense. The point is that this kind of trading affects the culture of the whole institution. And when it becomes important in the institution, that you've got some very highly paid people for taking this kind of risk and speculating, people elsewhere in that commercial bank, traditionally conservative people, worried about credits, being careful, say, “What's going on here? I mean I want to get better paid too and I want to take some more risk. And maybe I'll make some riskier loans. And then they'll pay attention to me.” And it really is, I think, rather destructive of the culture of the institution.

In addition, when it's clear that this activity almost inherently creates conflicts of interest. And we have enough conflicts of interests in banking institutions anyway traditionally. But this is a conflict of interest not between two customers, but a conflict of interest between the bank making money and its customers' interests.

BILL MOYERS: My understanding is that, in essence the rule says they can't take my deposit that I put into their bank and gamble with it, right? Use it in the casino of--

PAUL VOLCKER: Well, it's not quite as direct as that. They can take whatever money they have, including money that they have from you and any other depositor and make bets on it in terms of changes in the value of securities. They’re making bets on the market.

But is it appropriate policy to subsidize what are essentially non-essential activities that may benefit the executives and the stockholders and the traders, but it’s not part of the essential public purpose of banks for which they are protected by the government.

PAUL VOLCKER: And there's no doubt, since the repeal of so called Glass-Steagall, which prohibited all trading, and that was a little more than 10 years ago, this has become a big business for a half a dozen big banks.

And these risks were a contributing factor in some of the difficulties in the financial system. But during the collapse of the system, some of the investment banks decided they better get a banking license. And the government gave them a banking license, so they now have access to the government support. And that's part of the problem. And they like it. They like the government support.

BILL MOYERS: Why do they like it so much?

PAUL VOLCKER: Because it provides them-- it provides their customers with a certain degree of comfort.

BILL MOYERS: Because they?

PAUL VOLCKER: They will be protected.

BILL MOYERS: By the Federal Deposit Insurance?

PAUL VOLCKER: Yeah, deposit insurance to some extent. I think even more important, the feeling that the central bank is there as a letter of last resort. And if they get in trouble they can call upon the central bank. And I'm sure looms in the minds of a lot of people is that, when push comes to shove they'll get rescued one way or another if they get in trouble.

Now the Dodd-Frank Act tries to rule out the idea of a government bailout. That is probably the single most important provision of the Dodd-Frank bill. But there's a lot of skepticism about whether it will really work. The bill says it prohibits the Federal Reserve or the FDIC from bailing out a failing bank.

BILL MOYERS: Says it fairly clearly, doesn't it?

PAUL VOLCKER: Says it rather directly and it says the stockholders will not benefit, the management won't benefit, creditors will be put at risk. In effect it says you've got a failing financial-- a big financial institution that people worry about the effects of the whole system, they get in trouble, the government can take it over. And at the end of the day that institution will be liquidated. And the government will get any money back that it put into it, because it will be the most protected lender. So that is a system which I think is a fair system. Whether it works or not has never been tested.

BILL MOYERS: But why is so much attention focused on the Volker Rule?

PAUL VOLCKER: Well, I think it's coming now to the point where it begins to take effect as a legal matter.

BILL MOYERS: In July, right?

PAUL VOLCKER: In July, so I think that has kind of focused attention. And there are-- a group of big banks that are actively involved in this. And they're afraid that it will curtail more ordinary trading activity, not just a proprietary trade. I understand that concern. I think that concern is overdrawn. I think you can make the regulation, and they will make the regulation, in a way that's rather sensible.

BILL MOYERS: So are you are saying that speculation by banks, increases the compensation of the CEO and that becomes an incentive--


BILL MOYERS: --for taking greater risk? And then also if--

PAUL VOLCKER: Increase-- it certainly increases the incentive of the guy doing the trading. Who, you know, typical compensation practice, he gets part of the profit.

BILL MOYERS: And if they know the central bank is going to help them cover their loss if things go badly, then that removes--


BILL MOYERS: --any, right.

PAUL VOLCKER: --removes one resistance to trading. Absolutely.

BILL MOYERS: And so the Volker Rule would stop that kind of--

PAUL VOLCKER: Well, stop.

BILL MOYERS: --speculative--

PAUL VOLCKER: It would permit ordinary trading to go on but take away the big speculative-- big or small speculative activity.

A couple of important elements here, from my point of view in enforcing this. The chief executive officers, the management and the directors of these banks have to understand, yes, this is a law. And your bank is not supposed to be engaging in speculative trading, proprietary trading.

And, in your own interest you want to control your traders, but you have to make sure you have the internal control systems that are translated into the individual traders so they know the limits of what they should be doing.

And then without tracing every transaction you have to have a reporting system so that the regulators can look and say, “Are there telltale signs of the rule being violated?” So you get the understanding at the top and you get the reporting at the bottom, so to speak. And you ought to be able to have a satisfactory control system in my view. And that's, I'm sure what the regulators are aiming to do.

BILL MOYERS: Can you regulate human greed?

PAUL VOLCKER: No, but you-- human greed isn't going to go away but you can put some limitations on it, for sure.

PAUL VOLCKER: I would have been in favor of relaxing Glass-Steagall. I would not, at that time have gone quite as far as getting rid of the whole thing. There was a whole ethos in the market, in the country, among economists, that somehow this fancy new financial system which developed around the same time, it's broader than Glass-Steagall. That somehow the markets would take care of themselves. And they wouldn't-- less risky rather than more risky. Now that turned out to be an illusion. And we're paying the price of some of those illusions.

BILL MOYERS: Well, that's an old shibboleth, isn't it? That the markets will correct themselves?

PAUL VOLCKER: I-- in my view, yes. But, you know, these were fancy new markets. Mathematicians were running them. The whole profession of so called financial engineering developed where people were adapting financial techniques, financial so-called algorithms, to financial markets. And I think they forgot one very essential point. Financial markets are run by human beings and not a physical phenomena.

All these mathematicians were used to dealing with physical phenomenon. And when you-- the simple one, when you know, when you flip a coin it comes up 50 percent of the time heads, 50 percent of the time tails. And you can't change that. That's a physical phenomenon. But when you begin, somebody can put their thumb in the process, then you have a different answer. And, I'm afraid the mathematicians didn't take account of human psychology, quite frankly.

BILL MOYERS: Let me play you one thing that a Republican Congressman Michael Grimm said.

REPRESENTATIVE MICHAEL GRIMM: I think the Volker Rule's a terrible idea. And I think it should be repealed. Proprietary trading. You know, as we just heard, was not a driving cause in the financial crisis and this rule, I think, is going to do little more than add needless costs and complexity to an untold number of financial transactions. So with that being said, it's my opinion that the regulators have also been a bit overzealous in proposing the rule and somehow found a way to take an-- you know, with-- through incredibly creative ways, actually, to make a terrible rule even worse.

BILL MOYERS: What do you think?

PAUL VOLCKER: Well, I don't know anything about Representative Grimm's background. Maybe he's a financial expert. Maybe he isn't. But I think, obviously he's totally wrong.

BILL MOYERS: But Wall Street argues that the rule would raise costs. And the office of the comptroller of the currency has said compliance and capital costs alone could reach one billion dollars a year.

PAUL VOLCKER: Costs, actual costs, no. It's not-- you have to make some weird assumptions to come up with that kind of--

BILL MOYERS: But you yourself have said that the rule is a little dense.

PAUL VOLCKER: It's complicated by its nature, but I-- you know, I go home and look at my insurance policy. When is the last time you read the 32 pages in your insurance policy in fine print? You'd say it's a terrible, complicated thing. We can't have insurance. It's so complicated because it has to cover every possible contingency.

I think what you want, as I said, and I think what the regulators have said, you want to make sure the bank itself has an adequate control system that is respectful of the law. And you have a system in place that ex-post, will reveal, certainly flagrant violations of the restriction.

BILL MOYERS: Why can't it be said that simply? I mean I read the other day that the law that set up our banking system in 1864 ran to 29 pages. The Federal Reserve Act of 1913 went to 32 pages. The Banking Act that transformed American finance after the Great Depression, the so called Glass-Steagall Act, was 37 pages. But that Dodd-Frank, which contains the Volker Rule, passed after the most recent crash is 848 pages long.

PAUL VOLCKER: Look, let me introduce you to the facts of life, Mr. Moyers. Modern life.

BILL MOYERS: I'm open.

PAUL VOLCKER: You know Washington. Washington was kind of a one-horse town then. None of the national law firms were there. None of the national trade associations were there. Because lobbying was a primitive business back then. Sure, there were lobbyists. But Washington wasn’t getting rich back then on lobbyists. And now you have lawyers crawling over all these, not just this law. Any law. And now, God knows how many millions of dollars have been spent on legal fees and on lobbying expenses, on this one provision of Dodd-Frank, and there are other provisions.

BILL MOYERS Well, they’re all over Congress. I mean, it’s a coordinated bipartisan campaign. Three Democrats and three Republicans are co-sponsoring the effort to beat back the rule. The Sunlight Foundation reports they’ve received altogether large sums of money from the financial sector. One Senator alone has received $3.6 million dollars from the financial industry in the last two years. All designed to try to dilute the rule you say is the heart of the problem.

PAUL VOLCKER Look, there’s no question in my view there’s too much money in politics and too much money in legislation these days. And nobody knows that better than you. Things have changed a great deal. I don’t know what we do about it. It’s a much bigger issue than the Volker Rule.

BILL MOYERS: Let me play for you something that Jamie Dimon, the CEO of JPMorgan Chase said the other day on Fox News.

MELISSA FRANCIS: A lot of people wanted me to ask you about the Volker Rule. I know you wrote comments on how it should be different. What do you think?

JAMIE DIMON: So there are two parts. The part where they said no proprietary trading we're fine with. We've never had an issue with that. The part about market making is the part that everybody's writing long issues about. Like being an aggressive market maker. We are a store. Okay, we-- when you come to JPMorgan, we give you great prices in corporate bonds, you know, FX, interest rates.

Most of the business is driven by clients and we have the widest and deepest capital markets in the world. And so, remember, when the client calls up JPMorgan, if we don’t give them the best price, we don’t get the business. But the best price is a huge benefit for them. That’s not insult.

And we don't make huge bets. So I understand the goal to make sure that these companies don't take huge bets with their balance sheets, but market making, just like these stores down the street, when they buy a lot of polka dot dresses they hope they're going to sell. They're making a judgment call. They may be wrong.

So protecting the system, I agree with. But, you know, starting to talk about the intent, I tell every trader we have to have a lawyer, compliance officer, doctor, to see what their testosterone levels are, and shrink. "What's your intent?" No, we're going to make markets for our clients to give them the best products, the best services, the best research and the best prices. That's a good thing in spite of what Paul Volcker says.

PAUL VOLCKER: Despite what I say. Comparing these banks with putting polka dot dresses in the store for the Christmas season-- that's not the business banks are in. They're not in the business of stocking and this kind of stuff. They are buying and selling. If they're buying and selling in response to the customer, they can do it. That's what the law says.

BILL MOYERS: Well, what did you hear his chief objection to being?

PAUL VOLCKER: Well, I didn't hear it because he said, "We want to do market making," and I say, "Yeah, okay, do your market making, but don't mix up proprietary trading in the market making." You know, he's a very responsible banker, really. But he's gotten, I think a little overboard here because we're going to permit market making. But the United States government isn't protecting the dress shop. That's a big difference.

BILL MOYERS: But if you were a banker would you want the government to force you out of proprietary trading?

PAUL VOLCKER: No. If I was a banker I wouldn't want to-- of course I wouldn't. But you've got great advantages if you're a government regulated bank. Take the two big remaining investment banks. We used to call them investment banks. Goldman Sachs and Morgan Stanley. Both during the crisis got a banking license. Why'd they get a banking license? They wanted the protection of the government in the middle of the crisis. Now the crisis is over. If they want to do proprietary trading, they want to do a lot of other things, very simple, give up their banking license. They never had it before. So--

BILL MOYERS: Surrender their government umbrella?

PAUL VOLCKER: Yeah, get rid of the government umbrella if you want to do this.

BILL MOYERS: So your main point is that if they want to engage in speculation they just should not expect the government to cover their losses?

PAUL VOLCKER: They shouldn't be a bank. Yes. Because the implication is that government provides some protection. And before the investment banks got a banking license, there may have been five banks in the United States, very big ones, that carried on this business in a very active way. It's not the whole banking system. There's lots of trading that goes on by non-banks. You're not inhibiting market trading. You're not inhibiting making a market for customers. That was not the intent of the rule.

BILL MOYERS: I read, I actually read a statement by the community banks, small banks, in support of the Volker Rule.

PAUL VOLCKER: Yes. Yeah. Look, I find lots of bankers coming up to me kind of on QTC, you know, "We really think it's a good idea," but, you know, they're not hiring lobbyists at the-- running the banks. But, you know, there's a lot of support for it.

BILL MOYERS: After the calamity of 2008, the public clearly wanted to prevent banks from engaging in the same kind of risky activities that brought on-


BILL MOYERS: And yet here the public still wants that and yet the lawyers-

PAUL VOLCKER: The public wants the Volker Rule. No doubt about that. I have not yet found an audience, and I address a lot of audiences that say, “No, you're wrong. We don't like that.” They recognize the simple argument when you talk about the general public.

BILL MOYERS: What's the argument they recognize?

PAUL VOLCKER: They recognize that banks shouldn't be speculating in their money, as you put it.

BILL MOYERS: “Forbes” magazine has a good word for you. There was an article last month, and I'll quote it, “While the Volker Rule will surely put a damper on bank trading profits, it will force many firms to go back to the basic blocking and tackling of the financial services business, acting as intermediaries for their clients. It may also help the Fed, shareholders and taxpayers sleep better at night.” How about that?

PAUL VOLCKER: God bless Mr. Forbes or whoever wrote that.

BILL MOYERS: Are you--

PAUL VOLCKER: That kind of captures the essence of it, yeah.

BILL MOYERS: I like that term, going back to the “basic blocking and tackling of the financial services business.” That's what you've been calling it.

PAUL VOLCKER: That’s what I’m saying. And you shouldn't run a financial system on the expectation of dependence of government support. We're supposed to be a free enterprise system we're running. And the problem of course is once they get rescued, does that lead to the conclusion they'll get rescued in the future?

It's a tremendous worry about that. Called moral hazard. They will act in a risky way because they're going to be protected. And, put it very simply, the great cry, “too-big-to-fail,” the government had to rescue them. So let's get rid of too-big-to-fail. Very popular cry and call for reform, which the Volker Rule is one little part of that.

BILL MOYERS: So are you sleeping better at night?

BILL MOYERS: No, but I mean by that-- get-- here you've got this--


BILL MOYERS: --onslaught of banking lobbying and money pouring into Congress to stop the Volker Rule. And the predictions in the press are it's going to be diluted.

PAUL VOLCKER: Well, I think-- you know, I read those predictions a year ago when the law was first passed and there were objections. And I saw all these headlines about it was being diluted. Why are they here now when it's close to regulation time? Because it wasn't diluted. Much to their surprise when the regulators came up with the rules, it was an effective rule.

It may be too complicated. It may not be simple enough. I hope that can be changed. I said that from the beginning. Because I think the essence of the rule-- which is in the proposed regulation, the essence of it is manageable. And it'll be manageable for the banks. And it will be effective.

BILL MOYERS: Paul Volcker, thank you very much for joining me.

PAUL VOLCKER: Good-- thank you.

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