The House Financial Services Committee held a hearing today, Experts’ Perspectives on Systemic Risk and Resolution Issues. Paul Volcker testified. Here is his written testimony.

Volcker calls for the separation of banking from commerce and also calls for reforms in executive pay. He also calls for regulation of hedge funds and private equity firms. Volcker also implies that by saving the Zombie banks, the U.S. in fact has encouraged even worse risk taking and highlights these very questions so often written about on this site:

• Will not the pattern of protection for the largest banks and their holding companies tend to encourage greater risk-taking, including active participation in volatile capital markets, especially when compensation practices so greatly reward short-term success?
• Are community or regional banks to be deemed “too small to save”, raising questions of competitive viability?
• Does not the extension of support to non-banks, and even to affiliates of commercial firms, undercut the banking/commerce divide, ultimately weakening the commercial banking system?
• Will not investors in money market mutual funds find reassurance in the fact that when push came to shove, the Treasury with an extreme interpretation of its authority, took action to preserve those funds ability to meet their declared commitment to pay their investors at par upon demand?

What does Volcker suggest? Well, for one he is saying commercial banks should not be allowed to have ownership in hedge and private equity funds. Another is disallowing proprietary trading.

Without stating it, the above implies Volcker thinks we need to reinstate Glass-Steagall.

He also seems to be making reference to AIG, implying insurance companies should not be saved under systemic risk, more they should be barred from becoming derivatives traders. It's unclear to me if this includes credit default swaps.

Volcker also calls for a strong monitoring of interactions among financial institutions, especially through derivatives and credit default swaps trading.

Volcker also thinks limiting the Federal Reserve is a really bad idea. No surprise there since he once held the Chair position.

The Federal Reserve Board should not become an academic seminar debating in its marble palace various approaches toward monetary policy without the leavening experience of direct contact with, and responsibility for, the world of finance and the institutions through which monetary policy is effected.

Volcker does believe a new Vice-Chair position should be created within the Fed.

Volcker also thinks a body of regulatory agencies under the Treasury is going to be a cast of infighting cats, impossible to herd (my interpretation!)

A council of variegated agencies with their own particular challenges, policies, and constituencies cannot be expected to efficiently and effectively serve as a coordinating body.

I don't know boys and girls, Volcker is really promoting the role of the Federal Reserve as super regulator.

We get some parting shots at Freddie Mac, Fannie Mae as well as the credit rating agencies in the testimony.

In time, Congress must direct its attention to rebuilding the national mortgage market, avoiding, I trust, the now failed approach of mingling private and public responsibilities of so-called Government Sponsored Enterprises.

I also urge consideration of making a national insurance charter available to insurance companies willing to accept Federal prudential standards.

Large issues with accounting and credit rating agencies remain.

There are other bloggers covering these hearings.

Zero Hedge wrote up an analysis on Volcker's testimony. Zero Hedge not only concluded what I did, that Volcker is saying the U.S. must reinstate Glass-Steagall, but also believes Volcker just blasted to hell and back Goldman Sachs.

Volcker highlights "ownership or sponsorship of hedge funds and private equity funds [as] should in my view a heavy volume of proprietary trading with its inherent risks." If that is not a direct stab at Goldman Sachs, nothing is.

The Market Ticker also has a post on Volcker's testimony and comments on Volcker's endorsement of the Fed as super regulator:

The problem with Mr. Volcker's endorsement of The Fed as a continued systemic monitor and regulator is that the Fed has intentionally ignored outrageously predatory behavior, risk-hiding, loss-hiding and even UNLAWFUL activity by some of the banks and financial institutions under its supervision, including but not limited to IndyMac's deposit backdating.

Yeah, as long as you're incorporated and have a white collar it sure does seem you can get away with any brazen theft.

Ritholtz highlights testimony from Volcker on creating a FDIC like conservator, where instead of throwing gobs of taxpayer money at systemically risky institutions, we should wind 'em down and trash 'em.

He also called for a new “resolution regime” for insolvent or failing non-bank institutions of potential systemic importance. Rather than toss trillions at these self-wounded entities, we should instead appoint a special “Conservator” to take control of a bank in clear danger of defaulting on its obligations.

The Conservator should have the authority to negotiate an exchange of debt for new stock to resolve the near insolvent firm, to arrange a sale or merger, or, to arrange an orderly liquidation.

This authority would preempt normal bankruptcy/reorg, justified only by the risk of systemic breakdown.