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With the Old Breed: Pro-Regulation?

February 22, 2010

The Times recently had a fascinating article talking about the opinions of some of the street’s “old breed”, guys like John Bogle (Vanguard founder), George Soros (billionaire investor, legendarily shorted the pound and earned >$1B in one day), and William Donaldson (cofounder of Donaldson, Lufkin, and Jenrette). Many of these players are very supportive of much of the regulatory reform proposals coming out of Washington.

This is much in contrast to many of today’s biggest players, most notably Lloyd Blankfein and Jamie Dimon, who have been strongly opposed to the majority of the proposals coming out of Washington. It’s fascinating to me how much of a split there seems to be between these two generations. Certainly, not everyone in the same field will have the same opinions, and it’s easy to say that the Old Breed is merely reminiscing, having made their money and gotten out of the game long ago–superannuated as I heard it so aptly called. But even so, the split here is very interesting.

Now, while I will say that I think the financial system absolutely requires some further regulation, I’m not sure that Volcker’s proposal, which Soros et al are throwing their weight behind, is the way to go about it. While it’s heart is in the right place, I don’t think it goes far enough, and make some dangerous assumptions. For one thing, it makes the assumption that only those institutions that take customer deposits are systemically important. I think that Lehman showed that to be patently false. Furthermore, because it focuses on these consumer institutions, it wouldn’t have stopped Lehman or AIG from collapsing, two of the events that did the most damage to the financial system. And third, it’s very easy to get around it–Goldman, seemingly everyone’s favorite whipping boy, would simply have to get rid of their nominal consumer bank in order to continue going about business as usual.

Economics of Contempt has done a great writeup of some of the issues with the Volcker proposal for those interested.

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  1. Updated Volcker Rule Published « Alex Ravenel

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