Saturday, December 12, 2009

Volcker's Vampire Warning

Bloomberg reported:

Goldman Sachs Group Inc., which took $10 billion in U.S. bailout funds last year, shouldn’t get taxpayer support if the firm focuses on trading over banking, according to former Federal Reserve Chairman Paul Volcker. The “safety net” provided by the U.S. government “should not be extended beyond the core commercial-banking business,” Volcker, 82, said.
Der Spiegel had Volker's direct quote:

Let's just slice them up. I don't want them to get heavily involved in capital market activities so my view is: Hedge funds, no. Equity funds, no. Proprietary trading, no. Trading in commodities, no. And that in itself would reduce the size of the big banks. So you get some reduction in size. Equally important, you make them more manageable and easier to deal with if they do get in trouble.

It's more than egregious Goldman, the vampire squid. JPMorgan has five industry segments in addition to commercial banking. Two of them, investment banking and corporate/private equity provided 90% of the firm's third quarter income. High risk--high reward, soon to be backstopped by Uncle Sam.

Since January, Volcker, who was Fed chairman from 1979 to 1987, has called for regulators to provide government support only to banks that provide essential services like deposit- taking and business payments. He has suggested prohibiting them from owning or sponsoring hedge funds, private-equity funds or from engaging in proprietary trading.

JPMorgan handles billions in private equity and hedge funds. It has a significant market share in derivatives. Shadow bankers and unregulated products (akin to gambling) played a significant role in Wall Street's meltdown.

“I’m very interested in using this crisis as a way to avoid the next one,” Volcker said. “This isn’t any time to go back to business as usual.”

Sorry Paul, the more things change, the more they stay the same. Continued financial deform looms. There will be blood, the question is when and how much.