UPDATE 4-Volcker urges curbs on big banks’ risky trades

* Few details forthcoming from Treasury Deputy Wolin

* Dodd warns new proposals causing problems in Senate

* Bankers know what proprietary trading means-Volcker

(Adds Dodd, Warsh comments)

By Kevin Drawbaugh and Rachelle Younglai

WASHINGTON, Feb 2 (BestGrowthStock) – White House economic adviser
Paul Volcker on Tuesday told Congress to curb risky investing
by big banks, warning his soul would haunt lawmakers when the
next banking crisis hits if they did not heed him now.

The 82-year-old former Federal Reserve chairman, whose star
is rising in the Obama administration, faced tough questions
from lawmakers about the White House’s latest and far-reaching
proposals for a crackdown on the banking industry (Read more about the banking industry recovery.).

Few details were forthcoming from the venerable central
banker, or from U.S. Treasury Deputy Secretary Neal Wolin, who
testified with Volcker to the Senate Banking Committee.

President Barack Obama stunned financial markets in late
January by calling for new limits on banks’ ability to do
proprietary trading, or buying and selling of investments for
their own accounts unrelated to customers.

Volcker, considered a sage of monetary policy and a
crusader for tighter regulation, conceded such a move would not
have prevented the debacles at AIG (AIG.N: ) and Lehman Brothers
(LEHMQ.PK: ) at the heart of the 2008 financial crisis.

But he said that not adopting new trading limits today
would lead to another crisis tomorrow.

If proprietary trading is not curbed, Volcker told the
committee, “I may not live long enough to see the crisis, but
my soul is going to come back and haunt you.”

Banking Committee Chairman Christopher Dodd, a Democrat,
told the two witnesses he supports the new Obama proposals, but
complained they were coming very late to a financial regulation
debate that has been going on since 2008.

As a result, Dodd said, the proposals seemed to many
senators “to be transparently political and not substantive,
and it’s adding to the problems of trying to get a bill done.”

He said the administration needs to clue him in early on
anymore new proposals and be ready to answer questions. In this
case, he said, “We’re not getting good answers.”

He said piling on too many new ideas would be a mistake. “I
don’t want to be in a position where we end up doing nothing
because we tried to do too much,” Dodd said.


Since Obama unveiled “the Volcker rule,” named for its
chief proponent, analysts have speculated about exactly what
sort of trading would be off-limits if Congress adds it to a
sweeping package of reforms still being debated.

Some see a blurred line between proprietary trading and
market-making that helps customers. But Volcker disagreed.

“Bankers know what proprietary trading is and is not. Don’t
let them tell you any different … I don’t think it’s so
hard,” Volcker told lawmakers pressing for a clearer idea of
where the regulatory lines would be drawn.

Taken on early as an adviser after Obama’s election,
Volcker initially seemed to have little impact inside the
administration. But that has changed since the Democrats lost a
Senate seat in a special election in Massachusetts and Obama
has shifted to a more aggressive stance on Wall Street.

Under the Obama proposals, banks could not establish or
maintain a separate trading desk, capitalized with their own
resources and unrelated to customer business, Wolin said.

That could mean barring banks from using such trading desks
to speculate on the prices of oil, gas or equity securities, he
said, adding that the restrictions should apply to all banks,
including U.S. operations of foreign banking firms.

The KBW Banks index (.BKX: ) of large bank stocks was up
about 0.23 percent in broadly bullish trading on Tuesday.

Senator Richard Shelby, the panel’s top Republican, said he
was “quite disturbed” by Obama’s proposals being “air dropped”
into the financial regulation debate, which is more than a year
old. But Shelby said he was willing to consider them.

Senator Bob Corker, also a Republican, questioned the need
to crack down on proprietary trading at commercial banks,
saying firewalls already exist within bank holding companies to
protect deposit-based activities.


Despite the firewalls, Wolin said, banks that do
proprietary trading enjoy a cheaper cost of capital because of
the taxpayer backing of the deposit-funded sides of their
business models, which he said is unfair and should end.

In a sign of how the so-called “Volcker rule” may already
be having an impact, people familiar with the matter said on
Monday JPMorgan Chase (JPM.N: ) may be rethinking its acquisition
talks involving RBS Sempra, a joint venture of Sempra Energy
(SRE.N: ) and Royal Bank of Scotland (RBS.L: ).

The rethinking may be motivated by possible limits on
proprietary trading, the sources said.

Volcker — whose tight-money regime broke the back of
inflation when he was Fed chairman in the early 1980s under
Presidents Carter and Reagan — also wants banks to sever ties
to hedge funds and private equity ventures.

“What I want to get out of the system is taxpayer support
for speculative activity,” Volcker said.

A second hearing is set for Thursday to hear from
executives of JPMorgan and Goldman Sachs (GS.N: ).

Banking committee members are trying to negotiate a
bipartisan regulatory reform to avoid a repeat of the financial
crisis that caused the worst U.S. recession in decades.

Deep divisions remain among committee members over issues
such as managing systemic risk, bank supervision and consumer
protection. Obama’s latest proposals complicated the talks.

The House of Representatives approved a bill in December
that called for the biggest regulatory changes since the Great
Depression, but the “Volcker rule” was not included.

Obama also called for a new cap on banks’ market share
based not only on deposits, which are already capped, but also
non-deposit funding.

In related news, Federal Reserve Governor Kevin Warsh said
in an opinion article on the Financial Times web site on
Tuesday that giving regulators more power would not prevent
future crises, and warned of “grave risks” to the economy if
banks come to be regulated like public utilities.

(For a story on Treasury Secretary Geithner discussing a
new fee on certain banks, click on [ID:nN02243337])
(For the text of Volcker’s remarks, click on [ID:nN02108455])
(For the text of Wolin’s remarks, click on [ID:nN02108059])

Stock Today

(Additional reporting by Luke Pachymuthu in Dubai and Steve
Slater in London; Editing by Dan Grebler)

UPDATE 4-Volcker urges curbs on big banks’ risky trades