Former Fed Chairman Paul Volker testified on Capitol Hill last year, saying that: "As a general matter, I would exclude from commercial banking institutions, which are potential beneficiaries of official [i.e., taxpayer] financial support, certain risky activities entirely suitable for our capital markets. Ownership or sponsorship of hedge funds and private equity funds should be among those prohibited activities. So should in my view a heavy volume of proprietary trading with its inherent risks."
"I'm not sure the government can do anything to end 'too big to fail' even if it wanted to," pointed out Stanford Law School professor Joseph Grundfest, who is a widely recognized expert in securities industry law. "This is a problem that could be literally too big to fix."
Warren Buffet called derivatives "financial weapons of mass destruction" and lawmakers have vowed to put in place better checks to safeguard against systemic blowups tied to such instruments as Mortgage Backed Securities, Collateralized Debt Obligations and Credit Default Swaps that collectively helped bring the industry to the brink of the abyss.
Goldman Sachs CEO Lloyd Blankfein took heat Wednesday from Phil Angelides, the commissioner of the Financial Crisis Inquiry Commission, for his firm's practices of creating mortgage-backed securities, selling them and then effectively betting against them by engaging in short sales.
"It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars," Angelides said. "It doesn't seem to me that that's a practice that inspires confidence in the markets."
Blankfein responded by staunchly and repeatedly pointing to the bank's role as market maker, which, he insisted, inherently involves taking both sides of many trades and hedging those bets.
The Senate and the House want to increase the transparency of derivatives dealing, a mainstay of Wall Street banks, but no one expects much in the way of true reform. Bank lobbyists reportedly were able to effectively get the government to back down on efforts to better regulate certain types of derivatives, according to a recent Wall Street Journal report.
But a spokeswoman for outgoing Senate Banking Chairman Chris Dodd, D-Conn., disputed the report as uninformed, lobbyist propaganda. With the outstanding notional value of derivatives heading toward the mind-boggling quadrillion-dollar mark, if even a segment of the industry were to be more tightly regulated it would be a step in the right direction, said Moshe Silver, a veteran Wall Street compliance officer who writes a blog on compliance and regulatory issues for Hedgeye Risk Management.
"Getting some traction on the ability to regulate half of the derivatives industry might be more than the government even had the right to hope for," Silver said.