‘Wake up, gentlemen’, world’s top bankers warned by former Fed chairman Volcker

Source: TIMES UK

December 9, 2009
‘Wake up, gentlemen’, world’s top bankers warned by former Fed chairman Volcker


One of the most senior figures in the financial world surprised a conference of high-level bankers yesterday when he criticised them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms.

Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards and questioned their claims for financial innovation.

On the subject of pay, he said: “Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response, I can only say, has been inadequate.”

As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).

Read more: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6949387.ece

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”

Mr. Volcker is hardly a pinko commie, but he can see that there is nothing real being done here.

Further down,

Meanwhile, George Soros argued that CDS should be banned. The billionaire investor likened the widely traded securities to buying life assurance and then giving someone a licence to shoot the insured person.

“They really are a toxic market,” he said. “Credit default swaps give you a chance to bear-raid bonds. And bear raids certainly can work.”

credit default swaps serve some very useful functions. they give a quick indication of the concensus credit risk of a company. this is very useful in determining which supplier to enter into a long-term contract with, or to lend money to, or to otherwise do business with.

but recent events have made it clear that as unregulate instruments, they are subject to flagrant abuse. for starters, anyone "insured" against a company's default via a credit default swap should not be permitted to short the stock of that company, or be knowingly affiliated with anyone who shorts that stock, or otherwise knowingly engages in activities that could be reasonably expected to increase the probability of default of that company.

in short, regulations should rqeuire that you use should use credit default swaps only to mitigate losses from default of companies you want to succeed, not to profit from defaults from companies you want to fail.

additionally, all cds positions should be registered with the sec, so that they can investigate any suspicious activity.

Banksters shrug and ask, "What's the difference?"

I don't think banning CDS or some of these other gimmicks is the answer. But regulating them like any other securities transaction would be a good idea. Also, instead of making these "innovations" the centerpiece of our economy, they should be pushed out where they belong, to the periphery of the economy. If someone makes a killing in CDS, good for him, and more power to him. But if he loses his shirt, then the loss becomes his and his alone, and doesn't pull a supporting pillar out of the economy, weakening the entire structure.

Hard to believe as it may seem, but Volcker's right: There was a time, and not so very long ago, when the United States and the world economy had sustained growth while the markets were heavily regulated and taxed. People made money off of sound investments, building and manufacturing things, instead of betting a pile of house money on whether the market was going to tick up six points or fall three points today. You want to run those derivative games? Fine, have at it. But don't make those investments the driving engine for economic growth. Venture capital schemes used to be reserved for mad money investments. Now they form a main pillar of the economy, and they're flimsier than Burnham Wood.

a largely unregulated market place.

No one is going to invest in the "Shell Game" that is currently in place in the major US Financials

is "Siberia". It was the Obama/Financial/insurance Administration's way of putting someone with ideas that could help us and make them be responsible out to pasture.

money, they will take their "talent" elsewhere.

:sarcasm:

These people are the dimmest candles in the box - and I truly wish their talent was adequately rewarded with a nicy uncozy jail cell.

the nickel and diming via fees as a result of the S&L crisis of the 1980s.

The 12 step program for the greedy....