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'Group of 30' calls for big reforms
Former Federal Reserve Chairman Paul Volcker looks on at a news conference highlighting a new Group of 30's financial report. The report calls for more transparency and risk management in financial markets in order to avoid another global economic crisis.
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TEXT OF STORY
KAI RYSSDAL: Former Fed Chairman Paul Volcker addressed the financial industry issue of the day today: those ever-growing banks.
At a conference in New York, Volcker and a group of financial heavy-hitters unveiled a whole raft of proposals to reform the industry. And there is some serious reforming to be done. Those recommendations touch on everything from reining in hedge funds to restructuring Fannie Mae and Freddie Mac.
Marketplace's Amy Scott was there.
AMY SCOTT: Paul Volcker had one four-letter word to sum up the state of the banking system:
PAUL VOLCKER: Beginning with M. It's a mess.
Volcker is part of the Group of 30. Its members are corporate leaders, academics and former regulators. Today they proposed stronger oversight of "systemically important" institutions.
That is, banks, hedge funds and insurance companies whose failure could compromise the entire financial system.
Volcker says Adam Smith advised never letting an institution get that big.
VOLCKER: I think that advice, which may have been suitable for 1776 in Scotland, would be a little hard to apply in the United States and other modern economies.
Instead, Volcker and company say regulators should limit the risks those institutions can take and force them to keep more cash on hand.
John Dearie is executive vice president of the Financial Services Forum, a Wall Street trade group. The industry has long resisted increased regulation. But Dearie says he welcomes better regulation.
JOHN DEARIE: You don't want to put a financial sector in the box and regulate out of the system its capacity for innovation, its capacity for being competitive. At the same time, how do you strike that balance with the need for a safe and sound system?
Dearie says the Group of 30 reforms seem to strike that balance. And he suspects many of them will eventually become policy.
As an adviser to the incoming Obama Administration, Volcker has the ear of the president-elect.
In New York, I'm Amy Scott for Marketplace.
I agree that the "losers" (the people who didn't see all this coming) should not be crafting new regulation and policy. Create a group of "winners" that saw this coming, because there are plenty out there. I consider myself an economic conservative, but Bush Administration regulation of markets was almost non-existent which is not good. Some of the G30 suggestions are close though. Like forcing transparency upon hedge funds, that is good. In fact, expanding transparency in general is good for markets (do you hear that Fed and Treasury?!). The days of underwriting loans and then selling them off as fast as you can should end. Underwriters should always have skin in the game or else lending standards get thrown out the window. I agree that mark-to-market accounting should definitely be reexamined for assets that are fundamentily illiquid. Regulating OTC derivatives is also needed, no one even knew who was holding the default risk, it's been passed around like hot potatoe! I question financial innovation in principle, it should be debt, equity and mezzanine. Strictly enforce fraud prevention. And for goodness sakes, let capitalism work how it's supposed to in down times...let the loser institutions fail! Too big to fail? give me a break!
The Group of 30 that produced this report is well-populated with what you refer to as "financial titans" - including top executives of the very institutions at the center of our economic collapse: AIG, Morgan Stanley, Citibank, Goldman Sachs, Merrill Lynch, JP Morgan Chase, and so on.
So the institutions most in need of better oversight and tighter regulations are thus proposing what those new regulations should be? It sounds very much like "self-regulation". Given that this is a proven recipe for unmitigated disaster, I think the report should be considered carefully with this context in mind.
