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Is Paul Volcker the Father of "Too Big To Fail?"

rc whalen's picture


We posted a revised and longer version of the post last week on the Volcker Rule on The IRA web site last night.  The comments are mostly positive but also surprising because so few people know even the most recent history of the Fed and its key players.  You can read the comment by hitting the link below:

Most people don't know, for example, that Chairman Volcker was the intellectual author of "Too Big To Fail."  Volcker had a career at Chase before becoming a so-called regulator.  He always saw the world from the POV of a badly-run TBTF bank and Chase pre-JPM was certainly badly run. 

The difference between the world when Volcker was Fed chairman and today is the end of Glass Steagall.  Instead of bailing out simple lenders, the Fed now faces the task of managing and saving giant securities and securitization platforms that are too big to manage in a rational fashion.  Don't fool yourself into thinking that JPM chief Jamie Dimon or any CEO of a TBTF bank has the slightest idea what is really happening within their enterprise. 

To be clear, I don’t think Paul Volcker is influenced by anybody, but he has not changed either.  Paul was always willing to bend the rules for the large banks and empowered my old boss Gerry Corrigan to institutionalize the practice.  As one of my friends in TX said last night, "“bending” for the old big  banks under Glass Stegal and dealing with the monsters we have today are the difference between chicken shit and chicken salad."  Ditto.

Corrigan was the author of the doctrines of "Banks Are Special" and "Constructive Ambiguity."  He was head of the International Supervision Committee for the Fed but left before his term was up under misterious circumstances with overtones of regulatory failures involving BNL and BCCI. 

One rumor I heard at the time was that the Fed tipped off BNL so that the examinations would turn up nothing.  It was another example of the Fed's failure as a regulator.  And then there is the fiasco with BNP and the Iraq "Oil for Food" program, when the Fed again dropped the ball and literally looked the other way.

And of course Corrigan did away with dealer surveillance at the FRBNY, so that the industry practices reverted to pre-1993, then he went off to GS to collect his reward for bailing out that firm several times.  Does anybody remember the collapse of the Mexican peso?

At the end of the day, I do think that Volcker is sincere in his attempts to fix the system and restore some type of sanity and balance to the banking equation.  The trouble is, our indebted government, which Dan has written about very powerfully in his latest post, would rather have big banks and the housing GSE be TBTF because that means that Washington can continue to borrow, print paper money and keep the game going for a few weeks longer. 

The focus by Volcker on hedge funds and prop trading should be a warning signal to the markets that the politicians are preparing another surprise.  Hedge funds are the rational response to an out-of-control government in Washington and mountains of fiat paper dollars.  As in Mexico and many other "third world" venues in which I worked during my adventurous youth, the US is regressing back to its emerging market roots.  And it will interest some readers of ZH that I am writing a book about this. -- Chris


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Tue, 01/26/2010 - 00:01 | Link to Comment Mr Lennon Hendrix
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Don Volker.

Mon, 01/25/2010 - 17:53 | Link to Comment brodix
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I've pointed it out here before, but Volcker didn't even cure inflation, since the recession he did cause reduced the demand for capital and you don't cure an oversupply by reducing demand. It only served to cover for the Treasury to borrow up excess capital and spend it back into the economy, while still paying interest on it. The irony of the super rich is the only way they can invest their wealth is to loan it back into the economy they drained it out of in the first place, then demand interest for the favor. The only difference between the credit bubbles of yore and today, is that they were primitive little firebombs compared to the financial hydrogen bomb we have today.

Mon, 01/25/2010 - 14:59 | Link to Comment Anonymous
Mon, 01/25/2010 - 14:09 | Link to Comment Anonymous
Mon, 01/25/2010 - 12:57 | Link to Comment Yardfarmer
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This latest exercise in political stage management is another act in the ongoing farce which has characterized this woeful administration from its inception. Rolling the old warhorse Volker out of the lumber room and slapping some new paint on this sorry weathered retread is a transparent and hopeless gambit, obviously a tacit admission that the wholesale looting of the country has run its course with the second phase of the deconstruction now on deck: Tsunami waves of residential and commercial default, insupportable and ruinous levels of taxation, unquenchable fires of inflation, state and municipal defaults crippling basic infrastructure and essential services along with requisite crushing austerity measures, in short a blighted and devastated landscape reflective of the economic war being presently waged on the American people by the likes of Volker, in other words a recapitulation of the Carter years on steroids. The $1.25 quadrillion black hole of derivative instruments guarantee there we have reached the point of no return despite Obama's cynical and disingenuous posturing.

Mon, 01/25/2010 - 13:41 | Link to Comment JR
JR's picture

Wow! Well said! IMO, this administration has one more sleight-of-hand card up its sleeve. Obama is set to announce new steps to help the "middle class" today in a partial preview of his State of the Union address--not to all of the middle class, of course, just segments of the middle class by transferring wealth from the tax-paying upper part of the middle class.  It's all a massive tax increase in the middle of a recession.  This is what the Democrats always do, use weasel words so everyone will think they’re talking about them, when they’re not.

In other words, the Obama administration is going to take the people in technology, the small business owners and those in professional fields across the board who are suffering from transfer of wealth socialism and put its other foot on their necks.


Obama to announce economic aid for struggling middle class families

WASHINGTON (AP) Jan. 25, 2010 -- President Barack Obama, determined to show he understands middle-class struggles, is offering new initiatives meant to help people pay bills and save for retirement. Obama was ready to announce the new steps Monday in a partial preview of his State of the Union address.

The proposals to be unveiled by Obama and Vice President Joe Biden at the White House include a doubling of the child care tax credit for families earning under $85,000; a $1.6 billion increase in federal funding for child care programs and a program to cap student loan payments at 10 percent of income above "a basic living allowance."

His initiatives also include expanding tax credits to match retirement savings and increasing aid for families taking care of elderly relatives (income ceiling?) That program would also require all employers to provide the option of a workplace-based retirement savings plan…

Obama will also call for caps on some student loans, limiting a borrower's payments to 10 percent of his or her income, and forgiving all remaining debt after 10 years of payment for those in public service work -- and 20 years for all others.

Mon, 01/25/2010 - 12:24 | Link to Comment Anonymous
Mon, 01/25/2010 - 11:55 | Link to Comment JR
JR's picture

Mr. Whalen says, “I don’t think Paul Volcker is influenced by anybody.” We remember former Fed Chairman Paul Volcker differently. His banking cartel operation came right out of the Fed’s Bailout Manuel.

While defending his fleecing of the American taxpayer for his whopper bailout of Continental Illinois in 1984, Volcker told the Senate Banking Committee:  “The (bailout) operation is the most basic function of the Federal Reserve.  It was why it was founded.”

How true. The Fed’s mantle of “lender of last resort” means if loans go sour within the Fed fraternity, the money is extracted directly through the Treasury or eventually through the hidden tax called inflation. That’s why the Fed was created – to manufacture whatever amount of money might be necessary to cover the losses of the cartel.

And while Volcker was giving the nation’s insolvent seventh largest bank a free ride, he allowed the small banks to fold, including the tiny Bledsoe County Bank of Pikeville, Tennessee, and the Planters Trust and Savings Bank of Opelousas, Louisiana.  During the first half of that year, 43 smaller banks failed without an FDIC bailout. 

Other big bailouts also occurred in that era when go-go bank earnings were vastly increased by self dealing and by reducing safety margins, including taking on risky loans and speculating in the securities markets. When First Pennsylvania Bank required bailout in 1980, Fed Chair Volcker said he planned to continue funding indefinitely until we…work out a merger or a bailout… [Irvine H. Sprague, “Bailout: An Insider’s Account of Bank Failures and Rescues” 1986]

The usual suspect big bankers went through the usual charade of going to Washington, then as now, to work out advantageous bailouts for Continental and for First Penn, arguing, as did Volcker, that familiar Fed refrain that the TBTFs are  “critical to preservation of world economic stability.”

What is never said regarding Paul Volcker as Fed chair is that when he raised the interest rates above 20% in the early 1980s after the Carter era, he broke the Biblical law of usury in America and paved the way for the current usury whirlwind. Take a look at your loan-shark credit card rates in the land of the justice.

Ever since 1933 Eugene Meyer resigned from the Federal Reserve Board of Governors (and months later bought The Washington Post at a bankruptcy), no member of the international banking families has personally served on the Board of Governors.  They have chosen instead to work from behind the scenes through carefully selected presidents of the Federal Reserve Bank of New York and other employees.  We can assume the same for the treasury.

Just as Tim Geithner as president of the powerful Federal Reserve Bank of New York was on the path from the Fed to the U.S. Treasury there is no doubt that Paul Volcker as a past president of the Federal Reserve Bank of New York from 1975-79 was on his way to chairman of the Federal Reserve Board, first under Carter and then Reagan.  Volcker began his career at the NY Fed as an economist   He was succeeded as president of the New York Federal Reserve Bank by Anthony Solomon, a Harvard Ph.D. who had a similar background to Volcker’s.  Keeping to form, there are many similarities between Geithner’s rise to the treasury and Volcker’s to the Fed chairmanship.

The New York Times, on the appointment of Volcker as Carter’s chairman of the Federal Reserve Board, wrote on July 26, 1979, that Volcker learned “the business” from Robert Roosa, a partner in Brown Brothers Harriman, and that Volcker had been part of the Roosa Brain Trust at the Federal Reserve Bank of New York, and, later, at the treasury in the Kennedy  administration.  “David Rockefeller, the chairman of Chase (now JPMorgan Chase), and Mr. Roosa were strong influences in the Carter decision to name Mr. Volcker for the Reserve Board chairmanship.  Robert Roosa was Carter’s secretary of the Treasury, and represented not only Brown Brothers Harriman of the London Connection, but the Trilateral Commission, the Council on Foreign Relations, the Bilderbergers, and the Royal Economic Institute.  He also was a trustee of the Rockefeller Foundation and a director of Texaco and American Express companies.

On December 2, 1981, the Times mentioned that when Open Market Committee meetings were held, Solomon, as NY Fed president, and Volcker, as chairman of the Board of Governors, sat together at the head of the table and relayed instructions which they received from abroad (the city of London).

Mon, 01/25/2010 - 16:35 | Link to Comment Anonymous
Mon, 01/25/2010 - 13:05 | Link to Comment Yardfarmer
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excellent and invaluable background! kudos to JR!

Mon, 01/25/2010 - 13:35 | Link to Comment WaterWings
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Ditto. Big +1.

Tyler, switch out the article for JR's post. Volcker's comment about basic Fed function was worthy of a death sentence if we turn back a few pages in our history books.

Mon, 01/25/2010 - 11:39 | Link to Comment mkkby
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I've been reading Chris Whalen's crap at various sites.  His opinion is like poisonous mushrooms that pop up unexpexctedly.  He is king of the unsubstantiated garbage.  Demand evidence of things you believe.  Oh, and by the way, he's writing a book... what a joke.

Mon, 01/25/2010 - 11:58 | Link to Comment pak
pak's picture

I haven't been reading Chris Whalen), but I'd say, this post itself does not really address the issue raised in the header.

Mr. Whalen, you can't fool people with impressive headers and then feed them pedigree pal.

Mon, 01/25/2010 - 11:34 | Link to Comment ghostfaceinvestah
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Volcker was also the guy who insisted on the bailout of Continental Illinois, when the FDIC wanted to let it fail.

Mon, 01/25/2010 - 14:47 | Link to Comment Ripped Chunk
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History repeats itself over and over and over......  All the boys in the club.

We the people must intervene. Our leaders will not lift a finger to stop the looting.

This system had run its course.



Mon, 01/25/2010 - 11:16 | Link to Comment pak
pak's picture

A good Fed Chairman, a bad Fed Chairman.. Good to whom? Bad for what? To me the best Fed Chairman would be.. Larry Summers. This is the someone who won't spare the monetary firepower!

With a predictable outcome.)

Mon, 01/25/2010 - 11:08 | Link to Comment trav7777
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The system cannot be saved.

Simple as that.  Regulation WILL NOT SAVE IT.

You cannot REGULATE AWAY mathematics.

We have an exponential growth system which requires that credit continue to grow.  Taking us back to where PEOPLE are the sole originators of credit is going to collapse credit outstanding and deflatively destroy the entire money supply.

There is TOO MUCH DEBT out there and every last dollar of it REQUIRES interest service!  That means that there must at some point be MORE debt elsewhere that finds its way into the hands of the payors in order to pay the interest service.

A monetary-system-as-debt IS a forced exponential growth animal.  There's no way around this; I can demonstrate it in a minute as it is simple mathematics.

Credit growth took off on its own when they figured out how to originate without using PEOPLE, iow, CDOs, MBSs, CDSs, and all the other synthetic instruments.  Erecting "regulations" to stop this will collapse credit creation back to 40 years ago.  Doing this would cause the EXISTING debts' interest service costs to consume the entire money supply.

All of this because of ACCOUNTING ENTRIES!  We have let the fuckin bankers BECOME the barbarous relic strangling our society!

If you review the anti-gold standard commentary more than 100 years ago, you see the same inability to find specie to service monetary needs imposed by DEBT.

Mon, 01/25/2010 - 14:40 | Link to Comment Noah Vail
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BINGO! Nothing left to be said.

Mon, 01/25/2010 - 10:36 | Link to Comment Anonymous
Mon, 01/25/2010 - 18:52 | Link to Comment Anonymous
Mon, 01/25/2010 - 10:32 | Link to Comment Jefferson
Jefferson's picture

Volcker and his G-30 cadre have a well defined global agenda which necessitates the engineered collapse of the US financial system.

While Volcker may primarily play a figurehead role at this juncture in his career, the nuts and bolts of derivatives are well understood by his policy wonk comrades at the G-30 who wrote the manual on derivative structures more than a decade ago.

The universal debt default we are currently experiencing globally is not accidental but rather a deliberate crash of the current international monetary system in order to make way for a new SDR, carbon cap and trade, and international financial transaction tax regime to be administered by the IMF/BIS/FSB cabal.

Any discussion of Volcker without a discussion of his stated advocacy of a single global currency controlled by a global central bank is hopelessly incomplete.

Mon, 01/25/2010 - 11:09 | Link to Comment trav7777
trav7777's picture

Enough with the tinfoil conspiracy Potent Directors BS.  These guys aren't that smart

Mon, 01/25/2010 - 11:54 | Link to Comment Gordon_Gekko
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The only thing they are smart at is finding ways to loot and pillage the public, and the fiat money regime is their best idea ever.

Mon, 01/25/2010 - 14:41 | Link to Comment Ripped Chunk
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+ !!

Mon, 01/25/2010 - 11:47 | Link to Comment Jefferson
Jefferson's picture

Why don't you actually research the speeches and policy papers being published re: plans for a new international monetary order before you dismiss facts in the public domain as tinfoil? Otherwise you will continue to come across as incredibly naieve and foolish.




Mon, 01/25/2010 - 11:03 | Link to Comment P Rankmug
P Rankmug's picture

Volcker was at Camp David as number two at the Treasury advocating Nixon to sever the gold link.  This ushered in the chaos industry which we have been dealing with for the last 39 years.  Think of Volcker as a father of world chaos.  Without a floating fiat currency linked to nothing except the feeble minds of CBs, none of the unnecessary roller coaster financial destruction we have experienced would occur---at least from the monetary side.  Of course, the captains of the chaos know when the swings occur and profit handsomely at your expense.  I agree, Volcker is now being brought in to finish what he started.

Mon, 01/25/2010 - 11:16 | Link to Comment bugs_
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Mon, 01/25/2010 - 10:26 | Link to Comment Anonymous
Mon, 01/25/2010 - 09:47 | Link to Comment Gordon_Gekko
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Paul Volcker is a wolf in sheep's clothing.

Mon, 01/25/2010 - 22:34 | Link to Comment 35Pete
35Pete's picture

+(1)/(USD relative to 1913)

Mon, 01/25/2010 - 18:53 | Link to Comment Hephasteus
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Or a dragon in wolf's clothing with sheeps stapled to it. You gotta use plenty of layering to mind fuck people without getting frost bite.

Mon, 01/25/2010 - 14:40 | Link to Comment Ripped Chunk
Ripped Chunk's picture

Volker - another Trilateralist/Bilderberger. If we want to mover forward into a new era, all these people need to be out of the picture in order for society to move forward in a new and productive way.  The old ways are finished. This fact has been clealy revealed to all.


Mon, 01/25/2010 - 14:35 | Link to Comment Noah Vail
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I agree, having read some of Volcker's recent speaches that I find very troubling. Its nice to have heros, but not invented ones. OTOH, with the Obamanation campaigning so hard to keep Banana Ben, there is ZERO HOPE of any improvement should he be tossed overboard. The recent pattern in government is that the successor is worse than the predicessor. This won't change.

Mon, 01/25/2010 - 09:45 | Link to Comment Anonymous
Mon, 01/25/2010 - 15:17 | Link to Comment Anonymous
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