The Battle Lines Are Being Drawn

Some of the most senior and respected figures in American banking are lining up to support financial reform.  Paul Volcker, Chair of the President’s Economic Recovery Advisory Board and former Chairman of the Federal Reserve, “signed up the support of nearly a dozen peers whose average age is north of 70 and whose pedigrees on Wall Street and in banking are impeccable,” as The New York Times put it, “giants like George Soros, Nicholas F. Brady, John S. Reed, William H. Donaldson and John C. Bogle.”

Volker has focused on reinstating restrictions on banks buying and selling securities for their own accounts.  But “most of his prominent supporters see that as a starting point in a broader return to regulation. And most do not hesitate to speak up in interviews.” Mr. Bogle, the founder of Vanguard, said: “I am a believer that the system has gone badly awry and needs massive reform.”  (See, “Elders of Wall Street Favor More Regulation.”)

On the other side, the younger generation, still active in managing Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup and the like, are fiercely lobbying Congress against such regulation.

Such generational splitting is far from unusual.  To begin with, older generations tend to be critical of the short-sightedness of their successors.  It is one of the few sources of leverage left to them.  In this case, we have the additional factor that the younger generation is in charge.  Still accountable for the profitability and competitive success of their firms, it is difficult if not impossible for them to detach from those interests and obligations without arousing a storm of criticism from those they are currently leading.  They run the risk of being seen as disloyal and, perhaps, even being fired.

What is unusual here is the public attention these conflicts are beginning to generate.  No longer speaking privately, they reveal the urgency of the issues, and the growing possibility that nothing will be done to reform the financial industry.  It is looking more and more like war.

Another sign of the growing conflict comes from Gary Gensler, the chairman of the Commodities Futures Trading Commission and a former Goldman Sacks partner.  An article in BusinessWeek details his aggressive stance on the need for regulation, along with his informed understanding of just how complex the problems are — and how determined his former associates are in fighting any attempt at regulation.

Gensler is particular effective because he was on the other side.  At first that made many suspicious of his motives, but the fact of the matter is that effective reform requires inside, detailed knowledge.  Moreover, as BusinessWeek noted:  Gensler can take on the banks without fear of annoying potential employers. “I don’t see myself going back to Wall Street,” he says. “That’s very liberating.”  (See, “A Goldman Guy Turns on the Street.“)

That’s the issue in a nutshell.  The senior bankers mobilizing in support of Volker are not going back to Wall Street either.  That frees them to speak their minds.  They may lose a few friends, but clearly they think it is worth that risk to make the changes to our financial system that need to be made.