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TheStreet Open House

Volcker Plan Disrupts Crisis-Era Deals

Updated to include statements from testimony.

NEW YORK ( TheStreet) - If Paul Volcker has his way, at least three crisis-era deals would be rendered a waste of time and money.

Volcker, a former Federal Reserve chairman who now leads the president's economic advisory board, is advocating for the separation of commercial and investment banking. Under his plan, large, diverse banks like Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC), would need to get rid of any businesses that engage in market activities for profit, or provide services for private entities that do, such as hedge funds and private equity funds.

" A dding further layers of risk to the inherent risks of essential commercial bank functions doesn't make sense, not when those risks arise from more speculative activities far better suited for other areas of the financial markets," Volcker says in a recent New York Times op-ed.

Paul Volcker
Paul Volcker

The 82-year-old economic sage has advocated this idea for some time, but is bringing his message to the Senate Banking Committee Tuesday in support of the recent proposal by President Obama that would put Volcker's plan into law. He is scheduled to speak at 2:30PM EST.

In prepared testimony released ahead of the appearance, Volcker downplays the challenges of implementing his proposal. He says it is "not difficult" to identify the speculating trading arms that would need to be separated from commercial banks. He also believes there are "substantial grounds to anticipate success" in reaching an international consensus on the issue.

He focuses more on the necessity of the proposed division between investment and commercial banking. He notes that corporate America went so far in chasing profit that the division issue doesn't just exist within the banking industry. Volcker takes thinly veiled swipes at the bailouts of American International Group (AIG) and General Electric's (GE) finance arm, noting that one was a loosely regulated insurer, the other an industrial behemoth, but both received hundreds of billions of dollars in taxpayer support.

Instead, Volcker thinks the innovative products and speculative trades should be left to firms that can't rely on public money. In his plan, the private world of hedge funds and private equity would still face oversight. If a large firm were in danger, it would be allowed to fail in a process managed by the "resolution authority" proposed by the Obama team.

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