Obama bank plan highlights Volcker’s new clout

WASHINGTON, (Reuters) – When U.S. President Barack  Obama launched a fight with Wall Street by announcing a new  plan to limit banks’ size, the man standing at his side was  former Federal Reserve Chairman Paul Volcker.

Volcker’s clout on the White House economic team was on  full display as the 6-foot-7-inch longtime adviser took the  choice spot next to Obama, who named his proposal to restrict  bank trading activities “the Volcker Rule.”

The 6-foot-1 Obama referred to Volcker as “this tall guy  behind me.”

U.S. Treasury Secretary Timothy Geithner and senior  economic adviser Lawrence Summers — who attended the  announcement but at a greater distance from the president —  still wield a tremendous amount of power.

Volcker, who commands respect on Wall Street and among both  Democrats and Republicans, is seeing a resurgence of his  influence after venting frustrations to friends that he had  been left out in the cold when it came to economic  decision-making at the White House.

The 82-year-old Volcker was one of Obama’s most influential  advisers during his 2008 presidential campaign and now chairs a  panel of outside economic advisers to the White House.

He had rarely been seen in Washington since the start of  the Obama administration and made no secret of a difference in  opinion with the White House over how to deal with the problem  of “too big to fail” financial firms.

Volcker’s fear, shared by some other economists, is that  newly consolidated U.S. banks might engage in reckless behaviour  on the belief that the government would never allow them to  fail because of their sheer size. Such risky activity could  leave the financial system vulnerable to another crisis, these  economists say.

Asked by the New York Times in October about reports he was  losing sway with the Obama White House, Volcker retorted that  he “did not have influence to start with.”

That made Volcker’s presence at the announcement all the  more significant to showing Obama’s resolve to push the new  regulatory approach that Wall Street appears set to fiercely  oppose.

“Volcker being there was huge,” said Simon Johnson, a  professor at the Massachusetts Institute of Technology and a  former chief economist at the International Monetary Fund.

The bank announcement elated many of Obama’s liberal  supporters, who have welcomed his tougher rhetoric in recent  weeks toward the banking executives he referred to in December  as “fat cats.”

Geithner and Summers, veterans of the Treasury Department  in the Clinton administration, have been criticized by some  liberal supporters of Obama who view them as too cozy with Wall  Street. Legislation in 1999 tearing down the Depression-era  Glass-Steagall law separating commercial and investment banking  passed under their watch.

Obama’s new bank rules would not bring back Glass-Steagall  but would revive its spirit.

Volcker, who has been consulting on Capitol Hill about  Obama’s bank proposal, could be an asset to the administration  in selling the proposal, said Johnson. He shared Volcker’s  frustrations that the White House had not moved earlier to  limit the size of banks, which get an implicit subsidy in the  form of federal deposit insurance.

“Volcker carries a cachet that is unparalleled,” said  Johnson, noting the former central banker’s role in breaking  the back of double-digit inflation in the early 1980s — a  victory that came despite a huge popular backlash against the  economic pain brought on by his interest-rate increases.

RIFT WITH
GEITHNER?

In an indication of a possible rift, financial industry  sources told Reuters on Thursday of some reservations Geithner  had expressed behind the scenes about the new bank plan, which  was not included in the original plan on financial regulatory  reform that the administration unveiled last June.

Administration officials, while noting the importance of  Volcker’s role, insisted the decision to go forward with the  plan was unanimous.

Geithner and Summers worked closely with Volcker late last  year on it and had largely finalized it by late December. They  put the finishing touches on it on Jan. 13.

Aides said Obama personally felt strongly about moving  ahead on curbs on the banks, in part because of concerns about  risk-taking by banks after they returned to profitability in  the wake of the 2008-2009 financial meltdown.

White House officials played down any talk of Geithner and  Summers losing influence.

A trademark of Obama’s management style, which was apparent  during the deliberations over his Afghanistan strategy, is to  encourage the airing of dissenting views and then to work with  his advisers to arrive at a consensus.

“He is concerned to make sure that he’s exposed to all  points of view,” Summers told a small group of reporters in a  briefing last week when asked to describe Obama’s  decision-making process. “So he wants to hear disagreement with  things that he has said or advisers who have different  perspectives to share those differing perspectives.”

Interviewed on CNBC on Thursday night, Summers defended the  bank proposal against industry representatives who pointed out  that proprietary trading by banks was not central to the last  crisis. “What’s important is to not be like the generals who  fight the last war. What’s important is to think about the  potential sources of risk in the future,” Summers said.

Obama’s proposals could bar institutions from proprietary  trading operations, which are unrelated to serving customers,  for their own profit. Proprietary trading involves firms making  bets on markets with their own money and has been the source of  much of banks’ bumper profits.

Also emerging as a bigger player in shaping economic policy  is Vice President Joseph Biden, who devoted much of his time  last year to helping to oversee the $787 billion stimulus  program that Obama signed into law last February.

Biden feels “passionately about the same set of problems”  of firms becoming too big to fail and helped to shape the  proposal on banks, said one White House official.