The Volcker Revolution - Providing Some Much Needed Answers

Tyler Durden's picture

While many pundits will obsess over the markets' gyration in this past week, and make it into a major headline in the quest for eyeballs, the truth is that the S&P turning negative for the year was merely a sideshow (the next real market crash will be much more memorable). No - the real story was the advent of Paul Volcker to his rightful place on the, well, right of President Obama, coupled with the now imminent departure of Geithner and Summers, and the massive question mark that now hangs over Goldman Sachs. Who could have believed that the implications of one Senatorial election could be so profound, yet that is precisely the stuff black swans are made of. The new regime is here, and like it or not, it brings with it a new framework of variables. Yet shifting from the past and looking at the future, the question now becomes what should investors focus on? Just who is this Paul Volcker who will now be the President's seemingly primary economic advisor, and more importantly, what will his policies be like? Luckily, an extensive blueprint already exists, and Zero Hedge readers should be quite familiar with it by now.

In early January we discussed the very pertinent topic of money market funds, and as a resource to validate our view we reflected upon a little known paper written by the Group of 30, of which Paul Volcker (and Tim Geithner, and Larry Summers) are key members of. The members of the Group of 30 are precisely the same people who seem to make up Tim Geithner speed-dial rolodex, as disclosed earlier. In essence, the Group of 30 is the think tank that provide the theory for various policy-implementation platforms in high-finance society (usually these are necessarily ones that end up as a benefit to certain very critical Wall Street enterprises). The paper in question should serve as the 18 commandments for all who wonder just what it is that will be implemented as firm policy by an administration near year (even if, as Barny Frank claims, all will eventually be undone by the next administration).

The paper in question is "Financial Reform - A Framework for Financial Stability" and provides for a very insightful read into how regulatory reform will likely look going forward (sorry Barney, another thing that happened this week is that the President in essence said you can take your "sweeping financial overhaul" and shove it). One thing that the paper provides, for example, is much needed clarity, although not the full answer, into the definition of prop trading (are you reading yet Lloyd?):

Large, systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks and serious conflicts of interest. Sponsorship and management of commingled private pools of capital (that is, hedge and private equity funds in which the banking institutions own capital is commingled with client funds) should ordinarily be prohibited and large proprietary trading should be limited by strict capital and liquidity requirements. Participation in packaging and sale of collective debt instruments should require the retention of a meaningful part of the credit risk.

Sorry guys, but according to this the Goldman prop desk better be looking for a job stat.

Yet the paper does not end there, and it touches upon numerous fascinating aspects of overall financial overhaul, compared to which Barney Frank's magnum opus stands out like the corrupt 1,100 page contrivance that talks a lot, does nothing, and in fact provides even greater benefits to the existing financial organizations.

Topics covered include:

Deposit concentration

To guard against excessive concentration in national banking systems, with implications for effective official oversight, management control, and effective competition, nationwide limits on deposit concentration should be considered at a level appropriate to individual countries.

Money markets (and yes, Volcker's vendetta with money markets was extensively discussed previously)

Money market mutual funds wishing to continue to offer bank-like services, such as transaction account services, withdrawals on demand at par, and assurances of maintaining a stable net asset value (NAV) at par should be required to reorganize as special-purpose banks, with appropriate prudential regulation and supervision, government insurance, and access to central bank lender-of-last-resort facilities.

Hedge Funds:

For funds above a size judged to be potentially systemically significant, the prudential regulator should have authority to establish appropriate standards for capital, liquidity, and risk management... For these purposes, the jurisdiction of the appropriate prudential regulator should be based on the primary business location of the manager of such funds, regardless of the legal domicile of the funds themselves.

GSEs (a core topic that has so far been completely untouched in the current Frank gobbledygook, and one which Barney Frank wants to apply a sledgehammer to - why not, GSEs after all account for nearly the same amount of nationalized balance sheet risk as the Federal Reserve itself)

For the United States, the policy resolution of the appropriate role of GSEs in mortgage finance should be based on a clear separation of the functions of private sector mortgage finance risk intermediation from government sector guarantees or insurance of mortgage credit risk. Governmental entities providing support for the mortgage market by means of market purchases should have explicit statutory backing and financial support. Hybrids of private ownership with government sponsorship should be avoided. In time, existing GSE mortgage purchasing and portfolio activities should be spun off to private sector entities, with the government, if it desires, maintaining a capacity to intervene in the market through a wholly owned public institution.

Simplification of international structure:

In all cases, countries should explicitly reaffirm the insulation of national regulatory authorities from political and market pressures and reassess the need for improving the quality and adequacy of resources available to such authorities.

Central Bank lender of last resrort status and collateral transparency requirements (read this Alan Grayson):

Central bank liquidity support operations should be limited to forms that do not entail lending against or the outright purchase of high-risk assets, or other forms of long-term direct or indirect capital support. In principle, those forms of support are more appropriately provided by directly accountable government entities. In practice, to the extent the central bank is the only entity with the resources and authority to act quickly to provide this form of systemic support, there should be subsequent approval of an appropriate governmental entity with the consequent risk transfer to that entity. Central bank emergency lending authority for highly unusual and exigent circumstances should be preserved, but should include, by law or practice, support by appropriate political authorities for the use of such authority in extending such credit to non-bank institutions.

Risk management:

Strengthening boards of directors with greater engagement of independent members having financial industry and risk management expertise; Conducting periodic reviews of a firm’s potential vulnerability to risk arising from credit concentrations, excessive maturity mismatches, excessive leverage, or undue reliance on asset market liquidity; Ensuring that all large firms have the capacity to continuously monitor, within a matter of hours, their largest counterparty credit exposures on an enterprisewide basis and to make that information available, as appropriate, to its senior management, its board, and its prudential regulator and central bank;

Liquidity Risk Management:

Base-level liquidity standards should incorporate norms for maintaining a sizable diversified mix of long-term funding and an available cushion of highly liquid unencumbered assets. Once such standards are developed, consideration should be given to what is the preferred mix of senior and subordinated debt in bank capital structures.

Fair Value Accounting:

Fair value accounting principles and standards should be reevaluated with a view to developing more realistic guidelines for dealing with less liquid instruments and distressed markets...There should be full transparency of the manner in which reserves are determined and allocated. As emphasized in the third report of the CRMPG, under any and all standards of accounting and under any and all market conditions, individual financial institutions must ensure that wholly adequate resources, insulated by fail-safe independent decision-making authority, are at the center of the valuation and price verification process.


Off-Balance-Sheet Vehicles: Pending accounting rule changes for the consolidation of many types of off-balance-sheet vehicles represent a positive and needed improvement. It is important, before they are fully implemented, that careful consideration be given to how these rules are likely to impact efforts to restore the viability of securitized credit markets.

Rating Agencies:

Regulators should encourage the development of payment models that improve the alignment of incentives among the providers of risk ratings and their clients and users, and permit users to hold NRSROs accountable for the quality of their work product.

OTC Transparency:

Much-needed planned improvements to the infrastructure supporting the OTC derivatives markets should be further supported by legislation to establish a formal system of regulation and oversight of such markets.

No more TBTF: Resolution Mechanism for Financial Institutions:

In the United States, legislation should establish a process for managing the resolution of failed non-depository financial institutions (including non-bank affiliates within a bank holding company structure) comparable to the process for depository institutions...The regime for non-depository financial institutions should apply only to those few organizations whose failure might reasonably be considered to pose a threat to the financial system and therefore subject to official regulation.

Structured Products (or how to protect idiot investors from themselves and vulture banks offloading toxic crap - ref. Iceland):

The appropriate national regulator should, in conjunction with investors, determine what information is material to investors in these products and should consider enhancing existing rules or adopt new rules that ensure disclosure of that information, for both asset-backed and synthetic structured products.

And maybe most important, freedom and sharing of information

Efforts to restore investor confidence in the workings of these markets suggest a need to revisit evaluations of the costs and benefits of infrastructure investments that would facilitate a much higher level of transparency around activity levels, traded prices, and related valuations. Part of the costs of such changes is the impact on firm-specific concerns regarding the private nature of their market activity. These concerns, and direct investment costs, need to be weighed against the potential benefits of higher levels of market transparency.

Yet what is stunning is that in 29 pages, including 4 pages of bios, and several index and cover pages, Volcker managed to include enough policy proposals that could and should be the framework for a comprehensive overhaul of all that is broken in the American financial system. He also manages to shame Barney Frank with his 1,1XX pages of irrelevant ramblings (hopefully to resignation).

Volcker has already succeeded on prop trading: there are 17 other proposals remaining, which if implement by Obama, would finally indicate that this president is truly for change, and is not merely a puppet of the D.C./Wall Street corrupt political-hybrid machine.

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Mr Lennon Hendrix's picture

I am one paragraph in, but I had to say, THIS WAS THE PLAN FROM THE START!  Put fuckbuddies Summers and Geiththththner in there together (smoochy smoochy) and then act like Volker can do something about it!  back to the article.....

lawton's picture

Still dont think Obama will follow threw with anything with real teeth but if he is serious he needs to make sure all the doors are closed to those transactions or he will just be wasting time.

Mr Lennon Hendrix's picture

So now that the US is leveraged up, and the banks have all the cash, they are "allowed" to be run like proper businesses?  Well, any way to look at it spells DOOM!  Faber today?!  yeah?!  yeah!!!

Anonymous's picture

And now Obama is a star. He is featured in a movie-- exposing greedy hedge funds and market manipulation called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked short sold to hell, I liked it because it shows the dark side of Wall Street. DVD is everywhere but cheaper at

Apart from Reality's picture

Volcker is the single voice of reason in this whole sea of stupidity.  I predict he has an interesting death within the next few months.  The 'Club' (chaired by GS) do not like his brand of the truth and therefore it cannot be allowed to continue.

Anonymous's picture

"Suicided" is more common in foreign lands. Due to
his age the stress may put him in a premature grave.
Hope not we need him.

Anonymous's picture

Speaking of, our favorite psychopath Chavez is
spiraling out of control. Anti-Chavez station pulled
off the air reported 2 hours ago.

Trifecta Man's picture

Its all lip service until they start throwing the real crooks in jail.

Anonymous's picture

Be careful what you wish for at this rate you could
be next.

faustian bargain's picture

Key phrase is still "highly unusual and exigent circumstances". I don't care what kind of a 'good guy' Volcker is, if the Fed's still backing people up (via government agency or not), the risk is distorted. Take the net away, and the TBTF's have a lot more to lose if they slip off the tightrope.

Also, and I didn't read the pdf so maybe it's in there, I didn't see much about monetary policy in the text.

Anonymous's picture

screw volcker...screw timmay....screw summers....screw obama...screw buffett...screw em all

Anonymous's picture

you forgot someone, screw me because I'm a village idiot.

Andrei Vyshinsky's picture

Here's an interesting take by Randall Wray on the new Obama "populism" and how valid it is:

I see that the Prevaricator In Chief was in Elyria, Ohio, today pledging, "I won't stop fighting for you." I'd like to know when it was that he started fighting for me. Fox hole conversions on Tuesday nights by snakes of his type inspire nausea. With this about face, he proves himself as oily as Summers, as depraved as Blagojevich.

Dirtt's picture

He isn't talking about us.  He NEVER is.  He and FLOTUS and Valerie - First Trio - HATE true-blooded Americans.

Anonymous's picture

Is "true-blooded Americans" the new codephrase for the Klan Koffeehouse? I just wanted to make sure while I bleach my sheets for the meeting next Sunday.

spekulatn's picture

With this about face, he proves himself as oily as Summers, as depraved as Blagojevich.



Few should really be surprised here, folks.

Mr Lennon Hendrix's picture

That "town hall meeting" made me sick.  i can't believe people buy into that pep rally hype.

Anonymous's picture

I can't believe there is anyone out there still
watching his reruns.

Handle with care's picture

I think you missed the key part in the first quote  "Participation in packaging and sale of collective debt instruments should require the retention of a meaningful part of the credit risk."  This, if effectively implemented, will completely alter the debt markets.


The big problem with the mortgage market has been that the originator had no interest in the eventual performance of the loan, which is why NINJA loans happened and all the other insanities of the modern credit market.


If the originator has to hold on to a meaningful part of the loan they originate then they'll raise lending standards, which will mean less easy money, which will mean permanently lower housing and CRE prices, and probably higher corporate debt costs as well.


The rise of the securitization market and the delinking between origination and lending risk is probably the biggest single factor that led to the last credit bubble.  Even bigger than the Feds loose monetary policy in my opinion.  



After all, the supply of willing borrowers is always greater than the supply of able borrowers and delinking allowed the banks to expand loans beyond the able to the merely willing


Charley's picture

"The rise of the securitization market and the delinking between origination and lending risk is probably the biggest single factor that led to the last credit bubble.  Even bigger than the Feds loose monetary policy in my opinion. "

I think the biggest single factor was the offshoring of manufacturing jobs to industrial parks like China. Once that began, the domestic loose money policy and shameful origination practices became necessary in a game where debt was being used as a substitute for wage income. Richard Alford pretty clearly established this in his piece over at Naked Capital, and Edward Albert in the piece he posted here.

Handle with care's picture

I wouldn't disagree that allowing the owners of capital to engage in unrestricted global wage arbitrage has been the root cause of basically stagnant living standards for the majority of the population for over 3 decades and that drove borrowing, but without a willing lender the bubble couldn't have been blown and stagnant wages doesn't by itself explain the rise in ratio of house prices to income.  It was the banks no longer needing to care about loan performance that caused this bubble to be greater than any other in the past

Someone is much more likely to give you a loan if they don't need to care if you can pay it back.

I saw the 1997 Asian economic crisis at first hand and despite a 15% decline in living standards there wasn't an explosion in debt, in fact debt as a percentage of GDP fell by half, because the banks tightened lending standards as they no longer were playing with foreign money but had to be very concerned at the ability of borrowers to repay.

Prior to this they were channeling foreign money on the behalf of foreigners and I know first hand they didn't do due diligence before CRE loans as they were basically just collecting a fee for originating.  Hence a huge CRE bubble, the bursting of which caused other loans to go bad.

moneymutt's picture

Agreed, as another article posted by TD about Fed pointed out, loose money was a way to paper over economic decline in US for another decade or two without much reaction from US pop as debt and housing boom keep them happy on plantation. Funny thing is, housing costs (decoupled from flat incomes) were the single biggest expense that took down the standard of living of middle class Americans, who in 1970 could have a high school education guy make enough money to raise family of four single-handed, buy house, have a pension or save easily. Loose money and two income families disguised the drastic loss of middle class standard of living mostly expressed in high cost of housing compared to low wages.

It had to be purposeful, because when I, a financial rube started reading about securitization, it was pretty plain this was massive system-wide invite for everyone involved to commit fraud - from the home buyer (investor, re-fi-er or new homebuyer), the mortgage broker, the slicing and dicing sausage packer of the loans, the ratings agencies, the banks...if no one incurs the risk but keeps kicking it on to investors who have no good info about what they are getting, you just told the whole system of mortgage folks..."you are now at the beginning top of a pyramid/ponzi scheme, have at it and you will make some fabulous bling"... and as long as we are running up the price of the base asset, housing, everyone, including investors buying your crap will do on financial gods.

Every time something obvious happens, like a Cat 4 hurricane hitting New Orleans, or terrorist flying a plane into towers, or housing market crashing after biggest, craziest run in home prices ever seen, the rulers say, "who could have predicted, how could we have known, it was such a Black Swan?"

Whatever... the second some 24 year with a HS education made a million dollars in one year brokering mortgages, everyone paying any attention had to know that this would not end well, we should prepare. But of course we were told repeatedly that those sensible people warning us were crazy nuts just put on CNBC now and again for some laughs.

We have the common sense to build up a military to prepare for wars that have not happened yet, the military guesses what might happened and we spend big dollars getting ready to defend for it. But when it comes to economics cycles and natural disasters, we do baically nothing to war-game and plan, nothing prepare for bad things that might not happen. I don't get our disconnect.

We all have fear to appeal to make people worry about things that do not happen every day, and may not even happen in a generation, but we only appeal to the fear of war and terrorism (certainly something to fear) but not economic crashes, natural disasters, resource shortages, disease outbreaks.

And the PPT team does not count...rather a crack team of smart,well tooled financial cops/SWAT team regulators is what we needed...and unfortunately, any competent types like that were fired long ago.

WaterWings's picture


We need some heavyweight director (Spielberg, Howard, Stone) to make a movie yesterday entitled: Spitzer

Anything, anything to make the average American with two brains cells to rub together acutely aware of "...we all fall down."

Anonymous's picture

Handle.... You said,

"If the originator has to hold on to a meaningful part of the loan they originate then they'll raise lending standards, which will mean less easy money, which will mean permanently lower housing and CRE prices, and probably higher corporate debt costs as well."

... As if anything you listed was bad or not what we are already looking at as a result of this corruption bubble exploding into our faces.

I wouldn't worry about Obungle changing anything. An electoral tidal wave is forming off shore and he needs money for the levees. His Jew puppet masters are the source of the money... And the corruption that follows.


Stu's picture

my father-in-law ( deceased) told me back in 1982 that the US didnt manufacture s*** and it would be the death of us. Young and "smart" that I was, I argued back that the US was "ahead" of the game. The info tech age and we would prevail.


He grew up in the Depression, saved money, worked hard and God bless his soul for common sense. Ill never forget ...

Jefferson's picture

Well the globalists gave the national financial elites enough rope to hang themselves and, of course, they prompty proceeded to do exactly that.

International efforts to regulate financial institutions gained renewed momentum Friday in the wake of the Obama Administration's proposals to curb the size and spread of the biggest U.S. banks, leading regulators said Friday.

The U.S. moves, announced Thursday, are likely to make financial regulation one of the top items on the agenda at next week's gathering of world political and business leaders in Davos, Switzerland. The news hit bank stocks around the world Friday as investors concluded banks would face tougher government actions.

Until now, many investors had expected Washington to resist tough action on banks. Instead, the administration of President Barack Obama, responding to popular pressure, appeared to move into a leadership role with its proposals, jumpstarting a debate on global financial regulation that had begun to falter.

International banks said they were awaiting details of the U.S. plan. But the proposals—which would bar banks that take customer deposits from making big bets on financial markets for their own accounts—received a positive reaction from finance officials around the world, who said they were likely to influence other governments seeking to deal with banks that became too big or interconnected to fail.


International regulators say they expect banks to fight some of the proposals hard, though they may face difficulties given the hostile political environment toward bankers in many countries.

Doesn't it just make you all warm inside to know that thanks to Obama and Volcker the global money supply and all important economic decision making will eventually be  controlled entirely by a committee of benevolent gnomes in Basel?


A Man without Qualities's picture

The sections on risk management are very interesting.

Conducting periodic reviews of a firm’s potential vulnerability to risk arising from credit concentrations, excessive maturity mismatches, excessive leverage, or undue reliance on asset market liquidity;

The maturity mismatches goes to the heart of the main way the big banks make money - funding in the short term or overnight market versus investing longer term and making the spread.  The maturity mismatch is the root cause of the collapse, when Lehman Bear etc were unable to rollover their CP or fund in the interbank.  Matching up assets and liabilities would not prevent losses from loan defaults, but would prevent dramatic collapses.

Base-level liquidity standards should incorporate norms for maintaining a sizable diversified mix of long-term funding and an available cushion of highly liquid unencumbered assets.


Again, this is crucial, but the question would be how would you define highly liquid unencumbered assets.   Clearly, cash and government securities are the most liquid, but even Treasuries are only liquid providing there is someone with the cash to buy them.  Imagine where banks have bought huge amounts of Treasuries, funding short term.  There is a threat of short term rates rising, so the carry trade becomes less attractive and banks try to sell Treasuries, but given concerns over rising rates, prices are falling, banks start to panic and try to dump bonds, etc etc.  The problem with liquid assets is that nothing is highly liquid in all circumstances.

Stu's picture

get a grip...this is ridiculous


one week. lets see 2 months from now

lolmaster's picture

volcker is a dumb red-nosed red-commie

Anonymous's picture

Go to your room you brat you are grounded. He's
none of the above. For your information he is
a very decent, well informed, practical results
oriented man. Dumb is not one of the adjectives
that rolls of the tongue to those who have met him.
In sum you are an ignorant asshole.

lolmaster's picture

the kind of ppl who meet this red-nosed red-com are on average even dumber so their opinions have no merit

Anonymous's picture

Challenge your stupidity is evident & you can't
spell you're so drunk. You probably can't read
this because you face first in your keyboard. Don't
they have minimum IQ requirements to drive on
ZH? Guess not

moneymutt's picture

you are an obvious troll, your employers should get their money back from you for not fulfilling rule #5 below:

Troll job description:

1) make attacks against anyone that might hurt TPTB

2) don't argue facts or analyze things, keep comments to personal attacks and other subjective things that are harder to refute with logic

3) say really outlandish things that will illicit an emotional response so you can get people bogged-down in a going nowhere non-discussion

4) frequent sites the are spreading real information to general public to make it look like there is less support honest reforms

5) be a little subtle so people think you represent a regular person's view as opposed to a being a hired gun for elites...

ED's picture

Too late for prudence? Still have to go through a ringer between here and a sane financial system

David449420's picture

Great Digression. Just the hit I needed. (Hint - Crank it up)

1984's picture


zhandax's picture

If we have to tolerate one of the plutocracy, Tall Paul is probably one of the few with a concept of 'the average joe' and what 'joe's' real role is in the makeup of US commerce.  Eliminating the whole wretched mess is ideal, but an interim step may be necessary for political expedience.

john_connor's picture

"Who could have believed that the implications of one Senatorial election could be so profound, yet that is precisely the stuff black swans are made of."

Exactly my sentiment TD.

moneymutt's picture

I do think something was in the works prior, but Scotty's win appears to have accelerated it. Eliz Warren seem to imply there was a shifting she was happy with in her meeting with admin prior to Brown win. And Warren has not been exactly greatly embraced by Admin or Congress earlier on.

Whether you think its for sincere reasons, (Reggie), or for crass political reasons, (most ZHers), re-election fear has at least moved DC politicians toward a more economic populist stances. Even these idiots have realized they have to at least look like they are doing something. And economic populism may be the only political choice for Obama admin if they want to live on. Problem is the DCers are stuck between the population and the employers, wall street...hope it gets to be a tight squeeze.

Anonymous's picture

This is excellent distillation and analysis. Straight forward and actionable. Great work, Tyler.

The take home for me here is that Volker's rise means rates will rise. This looks to have started last week. Early is risky. Risky can be more profitable. I will trade and act accordingly.

Thank God I have never suffered from paralysis of analysis.


MarketTruth's picture

At this point all i want to know is what lawsuits have been filed against the outright fraud and who is right now in jail awaiting trial? Geithner and Paulson would be a good start since it has been proven they lied to congress during questioning. Am sure there are many hundreds more awaiting trial due to contract fraud, fraud in stock market manipultion, etc

Aaah, no one is in jail?
Oh, well then, that is all i needed to know. Thanks.


"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace. We ask not your counsels or arms. Crouch down and lick the hands which feed you. May your chains set lightly upon you, and may posterity forget that ye were our countrymen."
-- Samuel Adams, speech at the Philadelphia State House, August 1, 1776.


Anonymous's picture

Interesting how the market falls apart when Goldman & JP Morgan are cut off from their drugs and no longer can rely on their Fed Pocket orders to buy S&Ps at the end of the day. I believe that Volker through the Prez explained that pushing the market higher would only set it up for a bigger fall as the Prez got ready for his second term. Volker explained to the Prez that he is better off getting the negative stuff over now and then letting the market recover.

Prez cut off the treasury & Fed from interfering in market and as expected the market fell apart and it will continue as these big guys know first hand that the life line is cut off and they should get out of the market.

Intersting how this week called out new short rules by NASDAQ. They dont get it.

I beleive the DOW will retest the 6500 area and will most likley fail as market participants realize that that what proped the market was false reliance on transfer payments from the Treasury

Carl Marks's picture

You got that right, Jack.

Winisk's picture

Correct me if I'm wrong but a central banker is still a central banker, whose interests lie with the bankers and not the prosperity of the common person.  The debt based monetary system has an expiry date that no one man can change with improved risk management regulations.  We may have more confidence with the old guy at the back of the canoe but it won't change the river's current.

WaterWings's picture


Promises of recovery placate anger at this point. Many are converting permanently to "don't believe a word".

The old guy lost his paddle, then promptly lost ours after convincing us he was a better navigator. No more folk songs, old man, can anyone else hear that dull roar?