Financial titans talk moral hazards, punchbowls

While keynote speaker Paul Volcker gave Global Financial Leadership Conference attendees a glimpse of presidential thinking on how to revamp the economy (see my earlier post), the bulk of his speech and the question period after revolved around the more pressing matter of how to reform Wall Street without creating further moral hazards, a topic that dominated the day.

The influential Volcker agued that commercial banks need to be refocused on valuing customer relationships rather than hedge fund-like operations and trading their own book. “At one point the financial [sector's] profits was 40 percent of all the profits of the country – and that was measured after all the bonuses. It’s very hard to imagine that the financial sector was contributing something worth 40 percent of all the profits of the country. That’s a sign something was amiss,” he said, adding later, “Let’s encourage the basic functions of commerical banking and discourage those that create conditions conducive to financial breakdown.”

To Volcker that doesn’t mean a return to Glass-Steagall – but something close to it wouldn’t be bad. Operations that lead to an increase in commercial activity and lending would be okay – so corporate bond underwriting, banned under Glass Steagall to commercial banks – would be acceptable by a commercial bank. Private equity funds,  hedge funds and money market funds that aren’t regulated as tightly as traditional corporate savings accounts would not be okay at all for commercial banks. For freestanding hedge funds and private equity funds, more stringent reporting requirements would be neccessary to find out who posed a systemic risk.

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