JUST before the Fourth of July weekend, Paul A. Volcker packed his fishing gear and set off for his annual outing to the Canadian wilds to cast for Atlantic salmon.
Fred R. Conrad/The New York Times
Paul Volcker, a White House adviser and former Fed chairman, is worried that Congress may not do enough to prevent financial crises.
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Weekend Business Podcast: Jeff Sommer with Tim O’Brien and Louis Uchitelle on Paul Volcker’s disappointment.
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Fred R. Conrad/The New York Times
Paul Volcker in his office with his wife, Anke Dening. He helped to write part of the current financial overhaul bill.
He left behind a group of legislators in Washington still trying to nail down a controversial attempt to overhaul the nation’s financial regulations in the wake of the country’s most serious economic crisis since the Great Depression.
A well-regarded lion of the regulatory world, Mr. Volcker had endorsed the legislation before he went fishing, but unenthusiastically. If he were a teacher, and not a senior White House adviser and the towering former chairman of the Federal Reserve, he says, he would have given the new rules just an ordinary B — not even a B-plus.
“There is a certain circularity in all this business,” he concedes. “You have a crisis, followed by some kind of reform, for better or worse, and things go well for a while, and then you have another crisis.”
As the financial overhaul took final shape recently, he worked the phone from his Manhattan office and made periodic visits to Washington, trying to persuade members of Congress to make the legislation more far-reaching. “Constructive advice,” he calls it, emphasizing that he never engaged in lobbying.
For all of what he describes as the overhaul’s strengths — particularly the limits placed on banks’ trading activities — he still feels that the legislation doesn’t go far enough in curbing potentially problematic bank activities like investing in hedge funds.
Like few other policy giants of his generation, Mr. Volcker has been a pivotal figure in the regulatory universe for decades, and as he looks back at his long, storied career he confesses to some regrets, in particular for failing to speak out more forcefully about the dangers of a seismic wave of financial deregulation that began in the 1970s and reached full force in the late 1990s.
Despite his recent efforts to ensure that the financial legislation might correct what he regards as some of the mistakes of the deregulatory years, he’s concerned that it still gives banks too much wiggle room to repeat the behavior that threw the nation into crisis in the first place.
Some analysts share Mr. Volcker’s worries that the proposed changes may ultimately not be enough.
“It could be we will look back in 10 years and say, ‘Wow, Volcker really changed the tone of the debate and the outcome,’ ” says Simon Johnson, an economist at the Massachusetts Institute of Technology and a historian of financial crises and regulation. “But I kind of worry that is not going to happen.”
Hear, hear, says Mr. Volcker.
“People are nervous about the long-term outlook, and they should be,” he says.
AMONG the tools that Mr. Volcker has been able to deploy when regulatory debates heat up is the public support he enjoys in financial and political circles.
He earned that esteem over many years, and is famously credited for making tough-minded choices to tame runaway inflation as Fed chairman from 1979 to 1987, when he served under Presidents Jimmy Carter and Ronald Reagan.
At the age of 82, Mr. Volcker is from a generation of Wall Street personalities who accepted strict financial regulation as a fact of life through much of their careers. In his recent push for more stringent financial regulations than he believed Congress — and the Obama administration, for that matter — were inclined to approve, he lined up public support for a tougher crackdown from other well-known financiers who are roughly his age, including George Soros, Nicholas F. Brady, William H. Donaldson and John C. Bogle.
His most visible contribution to the current regulatory overhaul effort is what has come to be known as the Volcker rule, which in its initial form would have banned commercial banks from engaging in what Wall Street calls proprietary trading — that is, risking their own funds to speculate on potentially volatile products like mortgage-backed securities and credit-default swaps.
Such bets added considerable tinder to the financial conflagration that erupted in 2008. Many went horribly awry, and the federal government used taxpayer money to bail out banks, Wall Street firms and even a major insurer.
“I did not realize that the speculative trading by commercial banks had gotten as far out of hand as it had,” says Mr. Volcker, explaining why he first proposed the rule 18 months ago.
Congressional handicappers and Wall Street originally gave the Volcker rule a slim chance of becoming part of the overhaul bill — until, in fact, it got solidly on track to do just that.
Mr. Volcker thinks that Congress has watered down his trading rule — more on that later — but rather than roar in protest, he has resigned himself to the present shape of the Volcker rule as well as the overall legislation.
“The success of this approach is going to be heavily dependent on how aggressively and intelligently it is implemented,” he says, emphasizing that a new, 10-member regulatory council authorized by the bill will have to be vigilant and tough to prevent the nation’s giant banks and investment houses from pulling America into yet another devastating credit crisis. “It is not just a question of defining what needs to be done, but carrying it out in practice, day by day, bank by bank.”
The 2,400-page financial overhaul legislation, already passed by the House, is coming up for a vote in the Senate this week.
The Obama administration says it is now satisfied with the broader legislation, and in particular with the Volcker rule in its amended form.
“The Volcker rule was designed to make sure that banks could not engage in proprietary trading or create risks to the system through their investments in hedge funds or private equity,” says Neal S. Wolin, the deputy Treasury secretary. “We accomplished that.”
Some members of Congress who have backed the bill still say that it is not as restrictive as they would like, but that a more sweeping bill — one that also hewed to Mr. Volcker’s original conception — wouldn’t make it through the Senate, where the vote is expected to be close.
Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, subscribes to that view. He says that there are stronger measures he would have preferred to see in the bill, including the original version of the Volcker rule, but that political reality dictated otherwise.
“I would give the present bill an A-minus,” Mr. Frank says, “when you consider that six months ago people were saying the Volcker rule had no chance.”
Mr. Frank is quick to point out that Mr. Volcker signed off on the compromises that got the Volcker rule into the bill. Mr. Volcker doesn’t dispute that.
“The thing went from what is best to what could be passed,” he says.
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