Paul Volcker, the former Federal Reserve chairman who is pushing through new proposals to break up the biggest US banks, promised to come back and haunt Congress if it does not turn his plans into law.
The so-called "Volcker rule", which would ban any deposit-taking banks from running hedge funds or other speculative businesses, received an unexpectedly sceptical reception from members of the Senate banking committee yesterday, where law-makers condemned Mr Volcker for failing to provide detailed answers about how his plans would work.
Clearly frustrated, the 82-year-old adviser to President Barack Obama said that a failure to limit the speculative activities of banks would lead to a financial crisis in the future. "I may not live long enough to see the crisis," he told the committee, "but my soul is going to come back and haunt you."
The White House performed a U-turn on its financial reforms two weeks ago in the wake of the Democrats' defeat in the Massachusetts Senatorial election, adopting proposals from Mr Volcker that it had previously rejected. A first set of reform plans contain tougher capital requirements and leverage limits to make banks safer, and a new resolution authority to wind down "too big to fail" institutions, but they had stopped short of demanding any change to the businesses banks can be in.
Even Democrats who supported the Volcker plan expressed anger at the Obama administration for adding new proposals after one Congressional house had already passed a reform bill and the Senate was halfway through negotiations.
Richard Shelby, the senior Republican on the committee, said he was open to ideas that would improve the safety of banking, but was angry about the plan being "air-dropped" into a half-finished reform bill. Other members expressed scepticism that proprietary trading was relevant to the effort to prevent another credit crisis.
Proprietary trading is speculative trading carried out by banks on its own account, rather than trading conducted with clients, but lobbyists argue that both kinds of trading are risky and there is no clear distinction between the two. Mr Volcker dismissed that, but neither he nor Neal Wolin, deputy Treasury secretary, were able to provide a definition in response to law-makers' questions.Reuse content