Volcker to Wall Street: Bank or Trade

Banks may soon have to choose to function as either banks or proprietary traders – but not both, said Paul Volcker, head of President Obama’s Economic Recovery Board.

Volcker’s proposal, which Obama endorsed last month, would prohibit commercial banks from participating in proprietary trading.

“If you don’t want to follow those [banking] rules – you want to go out and do a lot of proprietary stuff – fine.  But don’t do it with a banking licence.”  Volcker said in a video interview with the Financial Times.

Major financial institutions can now operate as both, which enables them to borrow money from the Federal Reserve, accept retail deposits (our paychecks) and then use that money to trade in the stock market.

Companies that choose to continue trading would lose “the special privileges of a bank,” Volcker said.  “Don’t expect the support you would get from being a bank within the club of insured deposits and access to the Federal Reserve and all the loving attention you get as a bank organization.”

The proposal would basically reinstitute the Glass-Steagall Act, which Congress passed during the Great Depression to protect bank depositors from risks associated with the stock market.  A Republican-controlled Congress dismantled the act in 1999 because they said it upset the Free Market Gods.  And the rest is history.

Reimplementing the  rule is easier said than done, however; Congress would have to pass the legislation.  Banks control one of the largest lobbying groups on The Hill, and as we all know, Congressmen are willing to do anything for money.

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