Former US Treasury Secretary Henry Paulson said during a speech at ACG InterGrowth in Miami last week that he believes the Volcker rule, which would ban US banks from investing deposits in private equity and real estate operations, is a bad idea.
Paulson said that if the Volcker rule had been in place before the financial crisis, it wouldn’t have saved any of the major investment banks that failed or had to be acquired with government assistance.
He also said proprietary trading usually originates from a client transaction, and that hampering proprietary trading could thus unintentionally hurt clients.
“I think you get yourself into trouble when you single out any one type of activity,” he said.
Paulson said the creation of a systemic risk regulator would make the Volcker rule unnecessary, because the risk regulator could identify and prohibit any type of trading that was deemed to be a threat to the stability of the overall economy.
Former Federal Reserve chairman Paul Volcker developed the rule, which would force US banks to choose between running private equity and private equity real estate operations and taking deposits. The rule is being debated by members of Congress as they craft a financial regulatory reform bill.
Paulson’s views are held by many Republican members of Congress. Senator Richard Shelby – the banking committee’s top Republican – has said the Volcker rule wouldn’t have applied to investment banks Lehman Brothers and Bear Stearns, both of which sponsored private equity and private equity real estate funds and failed during the crisis. Lehman and Bear Stearns were seen as the catalysts of the credit crisis, yet Shelby said such institutions would not be affected by the Volcker Rule.
Responding to one challenge, Volcker told lawmakers in February that if speculative activity was allowed to continue at its current pace, “I may not live long enough to see the [next] crisis, but my soul is going to come back and haunt you”.
However, banking committee chairman Senator Chris Dodd has said he supports the proposals, which in his mind “make sense”. He cautioned though that questions remained over how the policies could work in practice.
Paulson was Treasury Secretary during the presidency of George W. Bush, and engineered the bailouts of AIG, Fannie Mae and Freddie Mac, as well as the bankruptcy of Lehman Brothers. He was previously the CEO and chairman of Goldman Sachs.