by Charlie Gasparino Info
Charlie Gasparino is a senior correspondent for Fox Business Network. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His latest book, Bought and Paid For, is about the Obama administration and Wall Street.
He's one of the greatest economists of our time and tamed inflation as Fed chief, but when Paul Volcker resigns as Obama's adviser, he'll be forever tied to a watered-down financial reform that won't prevent another collapse.
One of the saddest things about Paul Volcker’s probable resignation as one of President Obama’s top economic advisers is how he will be remembered. He won’t just be the Fed chairman who decades earlier performed a national service by defeating the economic evil known as inflation, but the bureaucrat who helped craft a convoluted financial “reform” law that has done little in the way of reforming activities that caused the 2008 financial collapse.
I am of course talking about the so-called Volcker Rule, a key provision of last year’s massive Dodd-Frank financial-reform act that was supposed to curtail Wall Street risk-taking but which even Volcker these days is disavowing. Volcker, it should be noted, came to the Obama administration with great fanfare. And why shouldn’t he have? One of the greatest economists of modern times, he was largely responsible for repairing the economy from “stagflation”—high unemployment and high inflation—and for the ensuing economic prosperity of the next three decades. Now he was advising a bright new president on how to rebound from the financial crisis of 2008 and the Great Recession that followed.
But Volcker spent much of his first year in the administration with very little influence on economic policy. The White House and its economic brain trust of Treasury Secretary Tim Geithner, chief economist Larry Summers, and senior adviser Valerie Jarrett were still cozying up to bankers and campaign contributors like JPMorgan Chase’s Jamie Dimon and Goldman Sachs’ Lloyd Blankfein. They didn’t want to hear advice from the crazy old man who showed up occasionally at economic policy meetings and groused about putting an end to Wall Street risk-taking once and for all.
Volcker didn’t seem to care. He spent long hours devising his plan to take Wall Street out of the risk-taking business, meeting occasionally with bankers he knew and trusted from his days as Fed chairman and later as a chief economist for an independent investment firm. These people said he spent most of his time listening to how Wall Street changed over the past three decades leading to the financial collapse, how it became less of a business that was paid to give advice and more of a gambling den that rolled the dice with shareholders' money with little accountability from regulators.
The great Paul Volcker spent his last days in public service putting his name to a watered-down rule that wouldn’t have prevented the financial collapse of 2008 and won’t prevent one in the future.
Paul Volcker. Credit: Joshua Roberts / Bloomberg via Getty Images
With that, Volcker came up with a plan that he believed would stop a crisis of the magnitude of the one that hit in 2008 and led to the destruction of two firms, Lehman Brothers and Bear Stearns, and the near destruction of the rest, from happening again. The banks, he believed, would no long be able to risk the firm’s own capital and blow it in a single trade. The banks would have to sell off other risky businesses like hedge funds and private-equity accounts not just because they created the opportunity to lose lots of money but also because, like trading, they have little to do with what Wall Street is supposed to be about—dispensing advice to corporations as well as investors.
Volcker, of course, had never really liked the big banks. He once quipped that the greatest innovation coming from the men of high finance was the ATM. He didn’t like the banks when he was Fed chairman, certainly not when he was out of government (just check some of his speeches), and certainly not now. And because of that, the bankers’ friends in high places, namely Geithner and Summers and ultimately the president himself, marginalized Volcker’s plan to make Wall Street a safer place.
That is, until the end of 2009, when Obama noticed a steep decline in his poll numbers and the public beginning to associate the most liberal president in years with the Wall Street risk-takers because unemployment remained at close to 10 percent on Main Street while Wall Street bonuses soared just a year after the bailouts.
First Obama went on national television to call his old friends on Wall Street—who supported him overwhelmingly during the 2008 presidential campaign—“fat cats” and professed his disgust at the billions in Wall Street bonuses only months after the bailouts. Then he announced, with Volcker at his side, that the era of risk-taking was over and that Paul Volcker would once again have his day in the the spotlight.
The Volcker Rule was then a key part of the new financial-reform bill being crafted by then-House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris Dodd. From the start, Volcker should have smelled a rat. Frank, for all his liberal bona fides, was always a close friend of the banking industry. Dodd, for his part, feasted off low-interest loans from Angelo Mozilo’s subprime monstrosity, Countrywide Financial.
In the months that followed, the Volcker Rule was watered down by the Wall Street special interests and the compromisers in Congress. Traders, for example, can continue to trade as long as they interface with clients; it’s unclear if the banks will ever have to shed any part of their private-equity funds and hedge funds. It also was exposed as a colossal waste of time, along with most of the rest of the financial-reform bill that was signed into law by the president last summer.
Clearly, firms lost money trading and investing in private-equity or hedge funds, but that was only a blip on their screens. The big money was lost servicing clients, the very thing the Volcker Rule is supposed to make Wall Street do more of; all those mortgage bonds that collapsed and ate into the solvency of the big banks were cobbled together for their clients. The Wall Street firms merely kept a piece for themselves when they couldn’t sell the entire batch.
As the housing market began to implode, the banks were keeping more and more of those bonds on their books. When those bonds became truly toxic in late 2007 and 2008, the banks were holding the bag as investors ran for the safety of Treasury bonds.
In other words, the great Paul Volcker spent his last days in public service putting his name to a watered-down rule that wouldn’t have prevented the financial collapse of 2008, and won’t prevent one in the future.
It’s a sad end to an otherwise great career.
Charlie Gasparino is a senior correspondent for Fox Business Network. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His latest book, Bought and Paid For, is about the Obama administration and Wall Street.
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I'm not an economist, but I do read the news and this is not how I see Paul Volcker's legacy with the Obama Administration. From what I'd been hearing Volcker had an uphill battle against the likes of Larry Summers and others who hated the Volcker Plan and wanted to keep more risk in our banks investments. Although Summers has left (good riddance!) I see Volcker's departure as one that he had to do. His advice wasn't as welcome as it should have been and the fact that I still read about dropping the "Volcker Rule" its clear someone wanted Paul Volcker's ideas to fix our economy, but most don't want to hear them. "Most" being those that are putting a stamp on the final product. This is just another sad legacy of the Obama Administration. One in which good and lasting changes could have been made, but concessions to those happy with some of the trappings of what put us in these terrible situations had more power in the end to make sure the changes wouldn't work.
I am in agreement with Mike. Mr. Volcker comes through this with his integrity intact! The one, whose integrity was impaired was that of the President. Everyone in America knows that the "Volcker Rule" was obliterated by Dodd and Barney, Mutt & Jeff. But, this is typical of Charlie Sleezerino. Pile a load of fresh horse manure on the reputation of a very good man, who had the audacity to not kowtow to Charlie's masters.
"...good and lasting changes could have been made." Arguable. Remember Senator Durbin remarking that the banks own the Senate? Consider the line more and more bank apologists are adopting: big bad government made us/them do it. The slowly emerging excuse/justification appears to be that the big banks didn't want to live in the world of the synthetic cdo, but were "forced" by other factors to embrace it. In what other world is "we didn't/couldn't see it coming" a credible excuse from men who make 10s of millions of dollars per year?
Mike, you synopsis is vastly superior to this idiotic article. Volcker obviously will be remembered for his term at the Fed in the late 1970s and early 80s, when he used strong medicine to crush inflationary pressure, which set the stage for growth throughout the 1980s and into the 90s. It completely changed psychology about inflation. This article title and intro makes it sound like what Volcker did the last 2 years was a big mistake, when he made the right arguments; they just weren't accepted by the others in the administration. TDB really needs to have higher standards for its pieces.
Oh, such drama! Charlie, nice headline, but FOREVER is a very long time.....and cliched.
"...he definitely hurt his legacy." This is what Kurt Warner said about Brett Farve. (Huffington Post) Headline to "damning" quote: "Warner Rips Farve." Headline hyperbole is here to stay.
ED You got that right about HuffPo. Headline Hyperbole in the extreme! Too bad it started off so good but I am sure the investors are forcing Ariana to draw more eyeballs every quarter. It has become big business and with that you loose some of you integrity.....cause sometimes it is not just the headline, but the entire story that is hyperbolic. Too bad.
You're right, your not an economist so perhaps some of you should stick to what you know, backseat driving. I find it funny that some people in this country seem to think its their place in life to chastise this President for not fixing this counties epic failure system fast that it created over decades fast enough, all in two years time.
The Paul Volcker I've read about speaks the truth despite the fact it may be unpopular. I admire his character and ethics.
Wall Street is, and has always been in the risk business. When the investment banks/securities dealers were playing with their own money, which they were more or less until about three decades ago, that was one thing. Their bets work now only because their rich uncle, Uncle Sam, will make good on them when Wall Street loses. In finance speak, in aggregate Wall Street's bets have a negative expected value over time, and when the high impact. low proabaility events do occur (and it's built into the "game" that they will from time to time) Wall Street's flunkies on Capitol Hill and in the Treasury and Fed write big bailout checks so the game can go on and the banksters keep earning fat "bonuses". Welcome to Capitalism 21st Century American Style! George Patton
I regret that Volcker has not loudly and publicly denounced Obama's caving in to the demands of his Wall Street backers. I hope he will do so.
Probably because unlike some of you, Volker isn't ideolog, he's an idealist. There were things Volker didn't liek in the bill and things he did like and things he felt we could improve on during the course of time. Some of you are so immature.
The marginalization of Paul Volcker shows how far "the center" has moved to "the right." =A respected economist and conservative, Volcker is no "pinko-liberal"; but, compared to the radicals who have taken over the Republican Party, he sounds like a progressive! (Volcker actually uses words like "fairness" when talking about the tax code, and says things like "business has a responsibility to more than profits" in their planning and decision-making.) =And, this new "center" is the one that President Obama promises to move further toward in the next two years in his endless quest to appease the "Party of 'No'." =God help us all.
Volcker is sort of an erstaz or casrdboard hero who was not that great a Fed chair. None of them have been in retrospect. Volcker's big accomplishment was wringing the 1970s inflation out of the economy by tight money policies and high interest rates. His era was hardly one of great social and economic progress compared to the 1945-70 period, but rather one of ongoing decline, loss of basic industries, rampant corruption and speculation, constantly growing inequality and the decline of the middle class and working class. No, there is nothing to take great pride in about this Second Gilded age of the last 30 years, in which Volcker and Greenspan played major roles.
if you understand that this is not about policy but about BO his actions make sense he is very good about letting others absorb the blame bad pr then moving on Volcker is and always was dressing Its Chicago style machine politics Its Kubuki theatre with Wall Street saying bad things about them but still wanting their campaign dollar so don't go to far to offend them Let the House go out on the limb then saw them off letting the Senate do the dirty work "A power has risen up in the government greater than the people themselves, consisting of many and various powerful interests, combined in one mass, and held together by the cohesive power of the vast surplus in banks." John C. Calhoun, 1836
My dead dead ancestor was quite right about that, wasn't he? I never agreed with John C's pro-slavery ideas, but he understood the nature of the capitalist system that was already taking power in the North at that time--and how the South was in its way.
So Obama should take accountibility for this nations complete failures as the new President?? I get it....which is why he was set up to walk into this mess in the first place. There is a shake up happening in the WH, like every WH after a mid term..its just that some people act as if this President is the first one to do all this. Volker could probably help Obama outside the belt way better then what he could within the system in Washington.
Im so sick and tired of watching some Americans judge this Presidents every move as if they have some type of moral standard over him...you dont have any moral standard over Obama, as a country you failed. Period. This is the system this nation built over several decades and now people are mad because it collapsed on your heads do to your neglagence? give it a rest. The worste is behind us and this country needs to move forward, continue to work on itself and hope for the best. I find it funny that everything Obama seems to sign is considered "watered down" by some on the left, yet he has given your party more liberal legislative victories then and Democratic President in recent memory and has at least made an effort to work on the healthcare and Wall Street systems at hand which is a hell of a lot more then I can say for this country that has barely worked on either system for deacades up untill now which is why they are a mess in the first place.
Then don't watch anymore.
Volcker should have known the Obama administration was just using him as a prop to distract from their corrupt ties with Wall St., Fannie Mae, and Freddie Mac. Why anybody would trust a team consisting of a tax cheat (Geitner), a failed Clinton retread who was instrumental in repealing the GlassSteagal (Summers), and an affirmative action race pimp from Chicago (Obama)? Volcker biggest mistake was in believing the Obama team cared about anything other than turning the USA into another failed Socialist utopia funded by the very same banks that crashed the economy.
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