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:

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

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