Paul Volcker: Banks’ Focus on Profits Shows Misplaced Priorities
When former Fed Chair Paul Volcker talks, people listen. Or at least they ought to listen, as there are few public servants whose experience in both time and breadth can compare to Mr. Volcker.
In his recent interview with industry analyst Mike Mayo and the CFA Institute, Mr. Volcker’s insights and observations proved Mr. Mayo’s description of him correct: he serves as
“a reminder of our collective duty as finance professionals to ensure that the financial economy is connected to the real economy.”
The banks, Mr. Volcker said, have misplaced their priorities with a focus on profits, a problem he says is largely attributable to incentive pay:
“You now have this situation with incentive pay dominating corporate and individual decision making. If the top executives are not getting as much pay as their competitors, the directors will worry about it and feel impelled to match the competition to show that they value your work. [It] has gotten all out of context, it seems to me. The amount of pay involved in the banks themselves is worrisome…”
Farther along in the interview, Volcker commented that, “The Holy Grail has been that the only thing that matters is how much profit the firm (and you) make…This is deeply in the interest of the people running these banks.”
Nonbanks also figured prominently in Messrs. Mayo and Volcker’s discussion, and are another source of concern, as Volcker commented:
“The non-banks have gotten much bigger relatively, and they don’t have the same regulatory framework. They have a lot more scope. The entire market is so much more complex, it is hard to follow.”
And, of course, they discussed the Volcker Rule, named for the man himself, prohibiting proprietary trading, and the relentless complaint from banks that it is too complicated and too complex. On that, Volcker said that it is actually quite simple:
“Are you operating for yourself, or are you operating for a customer?
“I heard complaints from banks: ’We know our customers want to buy securities. So we stock up on securities knowing that they will buy them later.’ To them it is heroic trading. To me it sounds like front running.”
Everyone should reflect on the state of finance and think about Mr. Volcker’s perspective.