“It doesn’t have the purity I was searching for,” Paul Volcker says of the new law.
On the evening of Wednesday, June 23rd, Paul Volcker, the former chairman of the Federal Reserve, was monitoring events on Capitol Hill from his office, which overlooks the ice-skating rink at Rockefeller Center. Volcker, who is eighty-two years old, works at a polished granite desk covered with correspondence, books, and financial reports. Apart from a slight loss of hearing, he is in robust health, and when he rises to greet guests he towers above them. His height (six feet eight inches) is initially intimidating, but that impression is soon mitigated by his wry manner. For a year and a half, Volcker, who serves as an economic adviser to President Barack Obama, had been waging a campaign to curb greed and speculation on Wall Street. This effort was reaching a climax, as the Senate and the House of Representatives worked to reconcile the lengthy financial-reform bills that each had passed.
Volcker retired from the Fed in 1987, and during the latter years of the tenure of his successor, Alan Greenspan, he was widely regarded as an out-of-touch fuddy-duddy. In the previous six months, however, he had emerged as a de-facto arbitrator for the various factions involved in financial reform: the lobbyists, the politicians, and the public-interest advocates. Barney Frank, the Democratic congressman from Massachusetts, who helped lead the process of reconciling the House and Senate bills, told me in late May, “When the banks come to me opposing various things, I say to them, ‘If I were you, I would go and see Paul Volcker. If you can persuade him, you might have a chance. I think you are not going to see anything in this bill that Paul objects to.’ ”
Frank had set June 25th as the deadline for finishing the bill, and during the final two nights of negotiations Volcker still appeared to be playing the role of esteemed referee. His main goal was to preserve the so-called Volcker rule, which barred banks from speculating in the markets—a practice known as proprietary trading—and from operating and investing in hedge funds and private-equity funds. Volcker believed that if such a policy were effectively enforced it would go a long way toward restoring the legal divide between commercial banking (the issuance of credit to households and firms) and investment banking (issuing and trading securities). That split existed from the Great Depression until the repeal of the Glass-Steagall Act, in 1999. Before the repeal, commercial banks were given government protection in case things went wrong, and investment banks were given freedom to do what they wanted with their money. Afterward, everyone was given the freedom, but it was no longer clear where the government safety net ended.
Volcker believes that commercial banks, such as Citigroup and Wells Fargo, are worthy of receiving government assistance—and even, in extremis, taxpayer bailouts—because firms and consumers depend upon them for credit. In return for these enterprises being sheltered, they should refrain from risky activities such as proprietary trading and sponsoring hedge funds. “If you are going to be a commercial bank, with all the protections that implies, you shouldn’t be doing this stuff,” Volcker said to me. “If you are doing this stuff, you shouldn’t be a commercial bank.”
The financial industry was lobbying vigorously to weaken the Volcker rule. Shortly before dinnertime on Wednesday, a Capitol Hill staffer called Volcker’s chief of staff, Anthony Dowd, a former investment banker, to let him know that Senator Christopher Dodd, the head of the Banking Committee, had released a new compromise proposal. The Democratic leadership needed the vote of Scott Brown, the freshman senator from Massachusetts, who had demanded changes that would please the big financial firms, several of which are based in his state.
Dowd wasn’t immediately alarmed, and Volcker was prepared to make some compromises. Earlier in the month, he had met with a group of bank C.E.O.s and lobbyists. Since then, he had been working with his two closest allies on the Hill, the Democratic senators Jeff Merkley, of Oregon, and Carl Levin, of Michigan, on new language that would preserve the essence of the Volcker rule while allowing the banks some flexibility in how they manage their money. Dodd’s new proposal largely stuck to this framework. In a significant concession, it allowed banks to invest up to three per cent of their capital in hedge funds or private-equity funds. But it included restrictions on this freedom, among them a specific dollar limit on investments.
Dowd assured Volcker that Dodd’s proposal contained no big surprises, and Volcker went out to dinner at the Harvard Club. Dowd called again around ten o’clock to say that things were still going according to plan. But when Volcker reached his office the next morning he learned that Dodd and Frank had agreed overnight to drop some of the restrictions in the compromise proposal, including the dollar limit on hedge-fund investments. “ ‘Shock’ is too strong a word,” Volcker recalled. “But I was disappointed.”
Despite Frank’s prediction, there were now going to be some things in the bill that Volcker objected to. Moreover, Senator Brown was demanding further changes, and the Democratic leadership and the Administration were determined to complete a package that President Obama could present to a G-20 meeting in Toronto on the weekend of June 26th. “I think they had priorities that were a little different from mine,” Volcker told me a few days later. “The President wanted a bill. He was going to Toronto. Everybody wanted a bill. It comes down to a squeeze play, and the sixtieth vote, or the person who’s perceived as the sixtieth vote, he’s got an awful lot of leverage.”
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