Roger Vasey, a former head of Merrill Lynch’s global debts markets submitted an editorial to the Wall Street Journal in which he adds his voice to the growing chorus of activists, economists, and former Wall Street insiders who believe that a strong Volcker Rule is necessary to prevent another financial catastrophe that the taxpayers would ultimately fund. The reason that taxpayers would be on the hook can be traced back to the destruction of the Glass-Steagall Act under Bill Clinton.
Wall Street bankers have lobbied to further limit the already near impotent version of the Volcker Rule contained in the Dodd-Frank Wall Street Reform Act. The rule, named after former Federal Reserve chief Paul Volcker bans banks from engaging in risky proprietary trades with taxpayer-backed funds. The banks fought the rule prior to it being signed into law and relentlessly fight it to this day. The bankers argument is that the rule constrains their ability to compete with foreign bank and to lend to business, among other things.
The Volcker Rule—part of the Dodd-Frank financial reform law—is necessary to correct a mistake that poses a danger to our economy. [...]
The number and complexity of various financial vehicles has grown over the years, but the principle remains the same. If the potential loss from a bank’s overall position across its securities holdings cannot be projected accurately under various deteriorating market conditions, and effective limits on that position established and monitored accordingly, that position should not exist.
And no financial institution with explicit or implied taxpayer support should be in the proprietary trading business.
Vasey emphasized his belief citing his own significant experience that it is possible to earn considerable profits employing less risky investment strategies. He explained that the the reason that investment banks acted less irresponsibly prior to the dismantling of the wall between investment banks and deposit institutions was due to the fear that the very same debt accumulation and inevitable unraveling that imploded the economy in 2008 would put their own funds at risk. He also pointed out that in the time period leading up to the most recent financial collapse, that investment banks were making riskier and riskier investments, knowing that the behavior would be backstopped by the federal government.