Former Federal Reserve Chairman Paul A. Volcker criticized bank regulators Wednesday, saying Congress needs to specifically act to rein in Wall Street and the nation's megabanks because the regulators won't do it on their own.
Testifying before the House Financial Services Committee, the chairman of President Barack Obama's Economic Recovery Advisory Board was asked to comment on the need for legislation banning banks from trading securities with their own funds and from owning or investing in hedge funds and private equity firms. Volcker has repeatedly called for such a ban, even saying that banks with Wall Street trading and Main Street lending operations need to choose between the two.
"In my opinion, it's very unlikely that the regulators and supervisors would evoke a strict prohibition until a crisis came and then it's too late," Volcker said. "That's why you want it in legislation."
Senate Banking Committee Chairman Christopher Dodd released the latest version of his financial reform bill on Monday. The legislation leaves it up to bank regulators to enact such a ban, and only after the Government Accountability Office conducts a "study." The Obama administration has pushed for an outright ban.
For regulators, "there's a lot of pressure not to do it," Volcker told reporters during a break in the hearing. That's why it needs to be in the legislation, specifically directing regulators to take action, he said.
In a mocking tone, Volcker said the banks would tell regulators, "'Don't touch us'...'What did we do wrong?'... You know, 'Leave us alone.'"
Dodd's bill, to the disappointment of reformers and consumer groups, leaves a lot of discretion in regulatory matters to bank regulators like the Federal Reserve, the Office of the Comptroller of the Currency, and the Treasury Department.
"Look, I've been a regulator for 20 years," Volcker emphasized. "So I know how they are."