Oh, Those Greedy Bankers

Article excerpt

Byline: Leslie H. Gelb

Legendary economist Paul Volcker speaks out on what's wrong with Wall Street today, the Ryan plan, and the Fed's bold moves.

When Paul Volcker speaks, Republicans and Democrats, labor and business, listen. The former Federal Reserve chair consented to a rare and exclusive interview with Leslie H. Gelb, a frequent columnist for Newsweek and The Daily Beast. The 6-foot-7, 85-year-old, gruff, plain-spoken yet very careful Volcker had some blunt and important messages for government and banking leaders--and for all Americans.

Gelb: Are the troubles in banking and finance--the illegal trading, the possibly illegal LIBOR-rate setting, the sky-high risk taking, the supposed difficulties bank heads have being able to control their subordinates--really something new?

Volcker: I believe it is something new in degree. I say that with some reluctance, thinking maybe it's just that I'm an old man and didn't know what was going on before. But I am struck by the number of not just friends but other observers who share the belief that there has been a real change in the mental approach of people in markets. They used to be more customer-oriented, with some sense of fiduciary responsibility that's been very much reduced into an impersonal, "you're a counterparty, you're not a customer" caveat emptor.

That attitude lies behind a lot of these difficulties and has been spurred by enormous changes in compensation practices. The temptation now becomes greater--that if I can, as they say, cut some corners, maybe I'll get some of this magic dust myself in proportions that seemed unimaginable a few years ago.

When they cut corners, is the head of the bank in a position to know and stop it, or have operations become so big and complex that bank heads can't know what's going on?

They can't know what's going on in detail, but the important thing is setting the tone and standards at the top to which people are expected to adhere--and if they don't, then action will be taken. All these banking institutions have fine statements of their ethical practices on paper, but how much it's really enforced, how much is in the instincts of staff, and particularly the traders, up and down the ranks, is difficult to say.

And you think it's worse today because the opportunity to make fortunes is now so great?

I hope I'm not just imagining things in old age, but when I was a young man in banking, you didn't have these huge compensation practices; bonuses were not considered appropriate, people didn't raid each other for talent, and so forth. There was a certain pride in professionalism. And there was much more emphasis on that than on making extraordinary amounts of money.

Is there any way to deal with runaway compensation, or is this a problem that can't be fixed?

In the end, it only really can be fixed by behavior in the marketplace, by which these rewards wouldn't be justified. I think part of the problem, to be a little bit personal, is this proprietary trading instinct, which gives rise to a very aggressive kind of behavior in an effort to make a killing for yourself as well as the company. It spreads through the institution, and people say, "Well, why don't I have that same kind of opportunity?"

Are the regulations now too vague, or are the regulators not capable enough?

Regulators obviously have an enormous challenge. But I think the regulators and markets and government have been imbued with the idea that markets left alone will discipline themselves. In a way, the regulators are outgunned. They do need the support of the senior executives of the institutions. If the talent at the top is forgiving of bad practices, or even encourages these practices, it's going to be very hard for the regulators to do anything. It comes back to this: what is the punishment when wrongdoing is found?

Let's take the LIBOR escapade [the London Interbank Offered Rate, an average interest rate calculated from data submitted by major London banks, some of which were found to be manipulating their rates for their own benefit]. …