Paul Volcker, Dodd-Frank and the Cult of Personality

rcwhalen's picture

Look in my eyes, what do you see?

The cult of personality 

I know your anger, I know your dreams 

I've been everything you want to be 

I'm the cult of personality 

Like Mussolini and Kennedy 

I'm the cult of personality 

The cult of personality 

The cult of personality 

"Cult of Personality"

Living Color/ Muzzy Skillings, Corey Glover, Vernon Reid, Will Calhoun


Bloomberg hit today: "Volker Rule Sets us Up for a Really Bad Day"

Update 1 | The implementation of the new regulatory stricture on big banks known as the “Volcker Rule” after former Federal Reserve Board Chairman Paul Volcker (1979-1987) is nearing completion today.  The New York Times reports: “Five years after the financial crisis, federal regulators are poised to approve the so-called Volcker Rule, the keystone of the most sweeping overhaul of financial regulation since the Depression. The rule, a copy of which was reviewed by The New York Times, imposes some requirements that are tougher than the banks had hoped.

Like the construction of the pyramids in ancient Egypt, the Volcker Rule is a monument, a memorial to Chairman Volcker erected by an American populace and media whose collective memory is somewhat shorter than that of the average hamster. Peter Eavis of the Times reports that Volcker “proposed limits on banks’ activities when he was chairman of the Federal Reserve.”  Really?  This is odd because the Paul Volcker that I know has always and everywhere been the friendly enabler of the depredations of the big banks.   We discussed this in the February 2012 post on Zero Hedge, “The Trouble with the Volcker Rule.”

I called Volcker “the father of too big to fail” in my 2010 book, “Inflated: How Money & Debt Built the American Dream,” but frankly watching the American media fawn over Chairman Volcker today suggests that this description was too generous.  Paul Volcker is the father of off-balance-sheet finance.  Just as FDR is remembered for his famous statement that “we have nothing to fear but fear itself,” and not for actively making the terrible deflation and banking crisis of 1932 far worse, Volcker is lionized as the great inflation fighter and financial reformer for fixing problems that he himself caused.  

The Volcker aura begins with the heroic battle against inflation in the late 1970s.  Who can forget the image of Tall Paul standing before Congress, mumbling in barely intelligible tones about the need for high interest rates to wage the fight against inflation.  By his own words, Volcker became a “practical monetarist” when the situation required it, adopting the latest style in policy to fit the political situation.

But how many people recall that it was Volcker, then a young Treasury official, who engineered the closing of the gold window by President Nixon?  By breaking the formal price link between the dollar and gold that had governed the post-WWII monetary world, Volcker and then Treasury Secretary John Connally loosed the US Treasury from the bounds of earth.  (Milton Friedman once did a regression analysis correlating recovery from the Great Depression with dumping the Gold Standard and found among the highest coefficients of correlation EVER for a "non-identity" relationship.)

As James Rickards notes in his new book, “The Death of Money,” the decision to abandon the gold standard by Volcker set in motion a decade of uncertainty and economic malaise that led to wage and price controls.  The closing of the gold window more than four decades ago set the stage for the madness of zero interest rates and “quantitative easing” that we see today from the Federal Open Market Committee.  Yet no one in the media ever questions Volcker about this reckless act.  

When it comes to the big banks, the cult of personality surrounding Chairman Volcker is even more deluded and bizarre.  When the Times talks about Chairman Volcker wanting to impose greater restraints on the largest banks, was this before or after he proposed the government bailout of Penn Square Bank to then FDIC chairman William Issac?  Along with his sidekick Issac, who was the Chairman of the FDIC in the 1980s, Volcker advocated allowing the largest banks to use off balance sheet Structured Investment Vehicles (SIVs) to increase leverage and profits.  As with the closing of the gold window in 1971, Volcker was the enabler of a problem that would cause enormous damage to the US markets.  Yet no one in the media knows the financial history of the US well enough to call him out on decisions and positions that are easily visible in the public record.    

In all of the 450 pages of “Volcker: The Triumph of Persistence,” William Silber never mentions the fact that former Chairman Volcker set into motion the process at the Fed that would eventually encourage bank entry into areas such as off-balance-sheet financial vehicles and over-the-counter derivatives.  After the debt crisis of the 1980s, Fed officials led by Volcker began to understand that the core operations of the big banks were unprofitable.  

Banks argued that the need to loosen regulatory restrictions such as Glass-Steagall was driven by the need for global competitiveness, but in fact they big bank were destroying investor capital.  Along with Volcker, another key enabler of this period of financial deregulation, Rodgin Cohen, chairman of Sullivan & Cromwell LLP, likewise receives almost no critical attention from the media as he argues that repealing Glass Steagall had no impact on the 2007 financial crisis.

Later on, of course, Volcker would argue that the banks needed more capital to prevent the bad acts that led to the accumulation of some $60 trillion in toxic waste by 2007.  But for some reason, nobody in the financial media is able to ask Volcker just why it was that he believed back in the 1980s that large banks could manage the financial, legal and reputational risk of off-balance sheet financial vehicles that were completely unsupported by capital.  

In 1982, under the chairmanship of William Isaac, the FDIC issued a “policy statement” that state chartered non-Federal Reserve member banks could establish subsidiaries to underwrite and deal in securities.   Also in 1982 the OCC, under Comptroller C. Todd Conover, approved the mutual fund company Dreyfus Corporation and the retailer Sears establishing “nonbank bank” subsidiaries that were not covered by the Bank Holding Company Act.  While the Federal Reserve Board under Volcker did ask Congress to overrule both the FDIC’s and the OCC’s actions, the Fed quietly supported the idea that banks should have broader securities powers and use SIVs to increase their effective leverage.  

By 1987, just as Volcker’s term was ending, the Fed approved regulations allowing bank holding companies to underwrite and deal in residential mortgage-backed securities, municipal revenue bonds, and commercial paper. Glass–Steagall’s Section 20 prohibited a bank from affiliating with a firm “primarily engaged” in underwriting and dealing in securities.  Half a century later, Citigroup, Lehman Brothers, Washington Mutual, Countrywide and other banks would fail because of acts of financial fraud related to underwriting bad securities, securities which were “sold” to SIVs that were in fact controlled by the sponsoring banks.  These transaction violated the dictum established by Supreme Court Justice Louis Brandeis in 1925 that failure to release control over an asset that was ostensibly being sold was “fraud on its face.”

The damages Volcker and Isaac caused do, however, continue.  They are still the "heart" of the "participation" problem, where unsecured and even subordinate borrowings are fraudulently reported as "asset sales."  That, I believe, is FAR more significant than Volcker's fight against inflation.  The tolerance for securities fraud by regulators is growing into the next bubble (along with derivative abuses equal to the "Lehman Repo-105" deal). All of these maladies stem from decisions made by Volcker, Issac and their contemporaries decades ago.

When we look at the Volcker Rule being approved by the Fed today, what is apparent is that the key issues which caused the subprime crisis – securities fraud and off-balance-sheet financial vehicles of banks -- remain unaddressed.  The Volcker Rule places limits on the principal trading activities of large banks, essentially sequestering the bank’s capital from the market, but does nothing to reign in the creation of bad assets by banks for sale to customers.  One could argue that the Volcker Rule is a canard, a diversion to prevent the public from focusing on the real problem, namely financial fraud by the officers and directors of the largest banks.  Since principal trading had little or nothing to do with the crisis, it seems reasonable to ask why we are even bothering with the Volcker Rule. Nobody in the media ever asks this question.  

The answer, sadly, goes back to the point about monuments.  The Volcker Rule is a monument to Paul Volcker the man.  It is a memorial to the idea that members of the media and the public, in their ignorance and naïveté, want to believe in, but the proposal does little to address the true causes of the subprime financial crisis.  Just as the Sarbanes-Oxley law was a monument to my friend Charles Bowsher, the former Arthur Anderson partner and head of the General Accounting Office (1981-1996), the Volcker Rule is a pyramid erected to honor Volcker the man, Volcker the idea, but has nothing to do with financial reform.  Like the quote from FDR, the cult of personality which surrounds Paul Volcker illustrates the superficial and puerile nature of American society when it comes to matters of economics and finance.  

Sarbanes Oxley, which was enacted in the wake of the securities fraud perpetrated by Enron and Worldcom (using off-balance sheet vehicles, please note) did nothing to address the issue of financial fraud using SIVs.   Likewise, the Volcker Rule limits the trading by banks for their own account, but does absolutely nothing to prevent banks from engaging in wanton acts of securities fraud against their customers.  Indeed, by limiting the ability of banks to deploy capital in the financial markets, the Volcker Rule arguably limits market liquidity and creates the circumstances for future financial contagion.   

Just look at the rout in the bond market after the June 19, 2013 press conference by Fed Chairman Ben Bernanke and you start to appreciate how the implementation of the Volcker Rule has added volatility and instability to the US markets.   One must wonder whether even Volcker himself understands how his eponymous rule will really impact financial institutions and markets in the months and years ahead.  But such is life in a democracy.  As the last line of the Living Color song “Cult of Personality” reminds us, “The only thing we have to fear is fear itself.”

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Stud Duck's picture

Paul Volker is in the 'top ten' of my hit list. His actions in the 1970-80's put many good men in the farming trade out of business. 20% interest is hard to handle while you produce food for less than the cost of production.


blindman's picture

cult of cult, no thought required, no person
left standing. just the corporate cult of cult
of cult ........
the cult of mono-poly, one from the many or something
like an e pluribus unum?
"...E pluribus unum (/?i? ?pl??r?b?s ?u?n?m/; Latin: [?e? ?plu?r?b?s ?u?n??])—Latin for "Out of many, one"[1][2] (alternatively translated as "One out of many"[3] or "One from many"[4])—is a phrase on the Seal of the United States, along with Annuit cœptis (Latin for "He approves (has approved) of the undertaking") and Novus ordo seclorum, (Latin for "New Order of the Ages") and adopted by an Act of Congress in 1782.[2] Never codified by law, E pluribus unum was considered a de facto motto of the United States[citation needed] until 1956 when the United States Congress passed an act (H. J. Resolution 396), adopting "In God We Trust" as the official motto.[5]"
annuit coeptis. the "one" of the many has "approved the under-taking",
get that? the taking from under. but who is this "he" born of the many?
the cult master i guess. the king! etc...
you get the picture

Riprake's picture

New President Assures Nation, 'The Only Thing We Have To Fear Is A Crippling, Decade-Long Depression'

My fellow Americans, the only thing we have to fear is a crippling, decade-long depression, one in which thousands will die by starvation, riots, or even their own hand.

Cult of PersonALity's picture

fear me...   dang  I even scare myself sometimes.

marathonman's picture

Just remember that leveraging cash deposits in fractional reserve loans ALWAYS eventually implodes.  That is the fundamental fraud that this current financial system rests on.  Write all the regulations you want, but the base of the system is fraud.

Paulson Bazooka's picture

A real red pill article, this one.

Paulson Bazooka's picture

Tyler, I think you should repost this on the home page, not just the contributors page.

Withdrawn Sanction's picture

The faith society (or more narrowly, politics) places in rules is comical.  For the masses, rule changes are eyewash to make things appear better.  For the politician/regulator, they are action masquerading as substance to give the appearance of "doing something."

In fact, rules yield as soon as circumstances warrant.  The FDIC Improvement Act (ca 1990s), required regulators to take "prompt corrective action" against seriously undercapitalized banks.  When the seriously undercapitalized nature of the largest banks became obvious in winter 2008/9, the rule was ignored, and the messenger (mark to market) was shot instead.  And this is just one, more recent example.  There are many many others.

Similarly, the Volcker rule, to the extent it has any teeth at all, will suffer a series of tooth extractions the moment it starts to bite.

ebworthen's picture

"The closing of the gold window more than four decades ago set the stage for the madness of zero interest rates and 'quantitative easing' that we see today from the Federal Open Market Committee."


The move from tangible to intangible led the way for the rest of the fantasy to unfold.

Something from nothing, lawlessness in a land of laws, serfdom in a land of freedom.

Radical Marijuana's picture

Yes, for sure we SHOULD despise personality cults! However, the mass media love such celebrities, since they create them in their own image!

To put ebworthen's comment into deeper historical context:

The "move from tangible to intangible" was manifested in the demonetizing of silver, long before the Federal Reserve was able to gain its strangle hold over the public money supply, which eventually generated problems which were "solved" by finally making a totally faith-based "money" (actually backed by nothing but violence.)


The Silver Saga

By Antal Fekete, December 5, 2012.

1872: Ernest Seyd is sent to America on a mission from the Rothschild owned Bank of England. He is given $100,000 which he is to use to bribe as many Congressmen as necessary, for the purposes of getting silver de-monetized, as it had been found in huge quantities in the American West, which would eat into Rothschild's profits.

1873: Ernest Seyd obviously spent his money wisely, as Congress pass the, "Coinage Act," which results in the minting of silver dollars being abruptly stopped. Furthermore, Representative Samuel Hooper, who introduced the bill in the house, even admitted that Ernest Seyd had actually drafted the legislation.

1874: Ernest Seyd himself admitted who was behind the demonetizing of silver in America, when he makes the following statement, "I went to America in the winter of 1872 - 1873, authorized to secure, if I could, the passage of a bill de-monetizing silver. It was in the interests of those I represented, the governors of the Bank Of England, to have it done. By 1873, gold coins were the only form of coin money."

AFTER silver was demonetized, and AFTER the privatized Federal Reserve Board was created, and AFTER that fiat money no longer had anything to do with any limitation by being related to gold, THEN the runaway fraud of privatized legalized counterfeiting was enabled to go into nearly perfect exponential growth of debts.

While it may take two to tango, one leads and the other follows. The banksters were able to lead the country, through relentless and ruthless application of the methods of organized crime, to destroy the meaning of "money" and gradually transform "money" to mean the opposite of what it always did before. ... BUT ... It is way too late now, since more than a Century of runaway destruction of the bimetallic standard for American money has enabled everything that could be robbed, to have already been robbed. Therefore, there is no way to fix things now by saying there should be no more robbery.

Since there are NO practical ways for anybody, and certainly not young people, to do anything meaningful to change the political system that they were born into, which is a runaway fascist plutocracy juggernaut, where those who could make money out of nothing always found more and more excuses to make more out of nothing, which then enabled that fiat money to be gambled with, over and over again, in crazier and crazier ways!

OF COURSE, there was relentless, ruthless and reckless privatization of profits, along with socialization of losses. The REAL meaning of these developments is the PRIVATIZATION OF SOVEREIGN POWERS TO ROB AND TO KILL. In those ways, the whole country became a raving mad house, wherein Fraud is King, and the mass media and public schools promoters of those frauds, primarily through skillful lying by omission, while teaching only the truth about trivia. That is world where the banksters and their buddies were able to dominate the mass media messages, as well as fund the schools to similarly support a fake education which is central to a fake democracy. Only in that world would it be possible for those who created the problems to be worshiped as those who solved the problems.

However, I repeat, there is no way to go backwards now. The original idea behind the bimetallic money standard in the USA was originally connected to the "ring of truth" in that money, as it manifested the law of nature of the conservation of matter, in the form of gold and silver. However, that has been superseded by the principle of the conservation of energy. Therefore, we now actually have globalized electronic fiat money frauds, backed by the force of atomic bombs. Therefore, we now already have debt insanities, backed by death insanities.

More radical truth would require a more scientific society, that provided a more scientific education. However, that is practically impossible inside of the established social pyramid systems, since more radical truth would necessarily reveal that those established systems are based upon legalized lies, backed by legalized violence, enabling runaway robberies of everything that could be robbed, which extremely unbalanced systems have already been at least 90%, if not almost 99%, accomplished.

Instead, the established systems are based on respecting a fundamentally fraudulent financial accounting system, while pretending that almost inconceivably crazy corruption, in the form of the legalized counterfeiting of the public money supply by private banks, that get to make that money out of nothing, as debts, is somehow a good thing, while the people who did that, and who try to maintain that system which was made through the triumph of applying the methods of organized crime, were somehow good people.

Volcker is obviously being treated within the cult of celebrities by the the mass media, since the mass media are necessarily the best professional liars and immaculate hypocrites that money can buy, whose job it it is to brainwash people to believe in the biggest bullies' bullshit social stories. The government of the USA is almost totally based on deceits in its death control systems, and frauds in its debt control systems. The greatest threat to the USA is the degree to which it is almost totally dominated by systems of huge lies, backed up by lots of violence, which are driving it more psychotically insane every day!

However, there is no way backwards to some old-fashioned form of the returning to the conservation of matter, in the form of gold and silver money. We are way, way, way, too far gone for that kind of return to ever work anymore. Instead, we really do have globalized electronic frauds, backed by the force of atomic weapons, and any "solutions" are going to have to deal with those realities!

The basic problem is that we should be looking at human civilizations as energy systems, BUT, when we do that we perceive how and why civilizations end up being controlled by the people who are the best at being dishonest, and backing that up with violence. Furthermore, there are no possible miracles which can make that stop. There are only possibly different dynamic equilibria between the different systems of organized lies, operating organized robberies.

The deeper problem is that when one does a more scientific analysis of human civilization as an energy system, it becomes clearer how and why civilizations became the biggest form of organized crime, controlled by the best organized gangs of criminals. There are NO ways to stop that from happening. Instead, there are only possible ways to maybe muddle through that madness. We have extremely difficult problems because our real human ecology evolved through the history of warfare, based on the maximum possible deceits, which then enabled the financial system to be base on the maximum possible frauds. Furthermore, there are good scientific reasons for how and why that happen, and NO good scientific reasons to believe that could be stopped, but only that the dynamic equilibria of those things could be changed.

The mass media, and school systems have become almost totally fake education, and misinformation, which attempt to persuade people that organized crime, controlled by the best organized gang of criminals, which have been robbing the vast majority of people more and more, while transferring that wealth to a tiny minority, is somehow a good thing, done by good guys, that we should respect! Tragically, it is practically impossible to imagine how we could ever actually have a more scientific education, within a more scientific society, that respected basic energy laws, and how they worked, because the ways that those actually worked during human history created War Kings, and then Fraud Kings, who dominate a social pyramid system through lies, backed by violence. That IS consistent with energy laws, but is presented through ways which are extreme bullshit, promoted by the biggest bullies, by school systems and mass media which do their best to promote a Bizarro Mirror World, where the biggest criminals are regarded in totally backwards ways as being the "good guys."

Thus, Volcker and Dodd-Frank are symbolic of the ways that the government of the USA became runaway legalized lies, backed by legalized violence, which was based on the schools and mass media doing their best to make sure that enough people are fooled enough of the time, so that still so much of the public looks at the Bizarro Mirror World in ways whereby they utterly fail to understand that everything they are seeing is actually BACKWARDS!

disabledvet's picture

I was expecting something "not good" and instead I got the best article ever written either here or at SA. LEVERAGE is the "bone sticking out of the skin"...nay, veerily..."if it's opaque or fraudulent...or just a mere conveyance (??!!!!!!!!!!!) that means "it's a financial product"?" this is no something solved by the "next big thing." the New New Thing...YES...but not the madness of the herd. I'm sorry...Bespoke you say? REALLY? How about MANNERS. "oh, rough and to learn to roll with the punches"? REALLY? We're finances bonuses...not a war...and certainly not ANY States. Unreal...surreal..."the place where time and anti-time can exist simultaneously" and make us all rich. They say Americans have never really had a great philosopher...and I think I'm beginning to understand why some say that is so. what we know can be heard, felt or expressed in some way? REALLY? We're not "limited beings" capable of far less than even the minuscule glow worm? Nature is never kind to such sentiment. "All things are never equal" in that space.

Pareto's picture

Yeah.  I smoked some of that shit about a year ago and quickly learned that if i ever want to make sense to anybody, that I oughta NOT smoke it - especially before I post something on ZH.  Excellent article btw ZH.

Dollar Bill Hiccup's picture

Religion and banking.

And doing G-d's work ... lol.

dizzyfingers's picture

...more of the same until the economy expires.

Dewey Cheatum Howe's picture

“The only thing we have to fear is fear itself.”

And spiders.

geno-econ's picture

According to many , Volker rule in it's final form will encourage off balance sheet shadow banking--- hope Volker stands around long enough to find out. He will be either a hero or villain, but can always blame it on bank lobbyists who undermined many provisions. A good example of Democracy and Polititians in action

OneTinSoldier66's picture

We have to pass the Volker rule to, uhhh, find out what is in it.


Like every financial "gov't regulation", it'll be interpreted and twisted to mean whatever the tbtf bankers and their tbtj buddies want it to mean.

Captain Willard's picture


Though Chris Whalen makes a number of interesting historical observations here, the real issues are the wide discretion of the bureaucracy in implementing the "Volcker Rule" and the continued abuse of the deposit insurance regime. Whalen correctly observes that the SIV/off-balance sheet monster could spring back to life at any moment, but this is less of an issue in today's market.

The Fed and the CFTC will have all the power here. They are wholly-owned subsidiaries of the banks and securities firms. When the dust settles, not much will change. Most of the exciting stuff will just move offshore, as there is a huge loophole in the rule to allow foreign branches more discretion in trading.