Volcker: Banks Don't Need Prop Trading

(MoneyWatch)  Goldman Sachs (GS) executives and other bankers contend that it's hard to distinguish "proprietary trading," in which banks play the market with their own money, from the investing they do for customers.

Fuggedabouit, says Paul Volcker in prepared remarks for the Senate Banking Committee. The former Federal Reserve chairman and current economic adviser to President Obama is appearing before the panel this afternoon to champion the White House's proposed bank restrictions, the eponymous Volcker Rules. He says:

"Similarly, every banker I speak with knows very well what 'proprietary trading' means and implies. My understanding is that only a handful of large commercial banks -- maybe four or five in the United States and perhaps a couple of dozen worldwide -- are now engaged in this activity in volume. In the past, they have sometimes explicitly labeled a trading affiliate or division as 'proprietary,' with the connotation that the activity is, or should be, insulated from customer relations."

Volcker also seeks to refute the perception pushed by many financial execs that prop trading is essential for commercial banks, particularly as a way to balance the risks they face in investing on behalf of clients. This additional layer of risk-taking is necessary for the capital markets to function, the argument goes.

But banks have lots of other, safer ways to make money, he notes in his testimony. These include the traditional repertoire of facilitating payments, taking deposits, providing credit and underwriting securities. And such activities are freer of the conflicts of interest inherent in trading for yourself while also trading for a customer.

Says Volcker:

"What we can do, what we should do, is recognize that curbing the proprietary interests of commercial banks is in the interest of fair and open competition as well as protecting the provision of essential financial services."

What he didn't say was precisely how those interests should be curbed. No surprise there. Today's hearing, where Deputy Treasury Secretary Neal Wolin also will testify, is an early pawn-push in the chess game over the White House's bank proposal.

That plan is certain to change, and probably be watered down, in the weeks to come. But in choosing to focus his remarks on trading, rather than on financial industry concentration and other elements of the Obama proposal, Volcker may be hoping to defend the part that he views as most vulnerable to attack by industry lobbyists.

Perhaps more revealing than what the witnesses say is how lawmakers on the Senate Banking panel, particularly committee chairman Chris Dodd, D-Conn., and New York Democrat Charles Schumer, respond and the sorts of questions they ask. As the game proceeds, that could could offer hints regarding Congress's real position on the Volcker Rules.