WASHINGTON — Former Federal Reserve Chairman Paul Volcker, who passed away Sunday at 92, was already a legend by the time he weighed into the regulatory reform debate in 2010, having earned policymakers' respect for often unpopular but ultimately correct monetary policy decisions while central bank chief.
But his role in the legislative response to the financial crisis may prove to be another enduring legacy, and not just because of the rule that bears his name, a provision of what became Dodd-Frank that banned banks from proprietary trading and was based
"Much more important [than the Volcker Rule] was the general regulatory framework and he was very, very supportive of that, of the whole notion, frankly, of reestablishing the connection between the ability to incur financial losses and the responsibility for bearing them," said Barney Frank, the former chairman of the House Financial Services Committee and co-author of the reform law.
Frank said Volcker offered crucial support to help pass the bill.
"He was a guy who had unchallengeable credentials, public sector and private sector experience, and he was one of the first to warn people that the crisis was coming and to criticize the lack of sensible regulation,” Frank said. “And then when the crisis hit, his expertise was very important in establishing the political support necessary for increased regulation as well as input as to how to do it. He had a credibility that was unmatched.”
It was a commitment that extended up into his final days, even while sometimes riling the banking industry in the process. Banks have
Thomas Hoenig, who served as vice president of the Kansas City Fed during much of the 1990s and as president of the regional bank from 1991 to 2011, said the fact that Volcker remained so focused on the rule that bears his name even in failing health is a testament to how dedicated he was to ensuring that the financial system didn’t sow the seeds of a future collapse.
“He was in failing health, and to think enough of the country to do that, I think speaks just so much about his courage and commitment," said Hoenig. "He was the personification of a public servant, and he sacrificed so much in the public interest.”
But Volcker was a man used to being opposed, and even vilified. As chairman of the Fed from 1979 to 1987, he inherited an economy bedeviled with both economic stagnation and high inflation — the so-called “stagflation” era — and set the central bank on a course of steep interest rate hikes that raised unemployment but also curbed runaway inflation.
Many observers praised Volcker on Monday, noting his decades-long commitment to making the system safer and the legacy he leaves behind.
“He was a giant,” said Oliver Ireland, a partner at Morrison Foerster who worked with Volcker at the Federal Reserve during the 1970s and 1980s. “He wanted the system to work well — he pretty much dedicated his life to making it work well.”
Volcker was known at the Fed as a powerful intellect, and a difficult person to know, Ireland said, but unwaveringly dedicated to acting on the facts, whatever they may be. On one occasion, Ireland said, he and a colleague were invited to Volcker’s office to brief him, and as his colleague was conducting the briefing, Volcker stared off, apparently uninterested. His colleague cut off his remarks, thinking Volcker wasn’t listening.
“ 'You stopped,’ [Volcker] says, and my colleague says, ‘I’m done,’ ” Ireland recalled. “And he says, ‘No, you’re not. Finish your thought.’ He was taking all of this in. He had a tremendous command of the facts and what was going on.”
While the Volcker Rule and Dodd-Frank bear Volcker's imprint, he was involved in several other banking policy debates as well. Volcker presided over an era of increased agitation by the banking sector to break the decades-old prohibition between commercial and investment banking enshrined in the 1933 Glass-Steagall Act.
Gilbert Schwartz, a former Fed attorney and partner with Schwartz & Ballen, said Volcker’s caution slowed the erosion of that barrier.
“He was the one who saw that it was inevitable that banks were going to get into the securities business,” Schwartz said. “What he did was establish a policy of ‘go slow.’ … He knew full well that if he hadn’t done it on a go-slow basis, Congress would have probably opened up the field without a transition.”
Schwartz added that Volcker’s deliberative attitude also curbed some of the banking sector’s impulses leading up to the savings and loan crisis of the 1980s, giving him added credibility in the industry and among the general public.
“He certainly was an obstacle to the deregulatory efforts of the [Reagan] administration because he believed it would have an adverse, destabilizing impact particularly on thrift institutions,” Schwartz said. “The thrift crisis that we had in '88-'89 pretty much proved that he was correct.”
Volcker also helped to elevate the needs of smaller banks, seeing them as a vital source of credit intermediation, Hoenig said.
“He had great respect for the largest banks in this country, and great respect for the community banks, and he very much tried to mold the system — or to at least influence the system — to recognize their relative importance,” Hoenig said. “I hope that in today's world, we can take that forward, because I know there's a lot of effort to pull back on some of the banks.”
Volcker’s preoccupation with reducing unnecessary risk in the banking system was not something he came to later in his career, Ireland said — it was a lifelong fixation. The Volcker Rule may have been his most visible and titular contribution to the regulatory canon, he said, but it was an outgrowth of a deep-seated wariness about market excesses.
“He was not a fan of speculation,” Ireland said. “He recognized need for active trading and markets to price the debt, but … he thought speculation was risky and didn’t think people should be doing it with bank deposits.
“His view hadn’t changed in 20 years,” Ireland said. “If he could have gotten [the Volcker Rule] enacted 20 years earlier, he would have done it.”
Volcker also contributed to and became a personification of the Federal Reserve’s political and intellectual independence. His determination to end inflation — even through politically unpopular means — and his ultimate vindication gave both him and the institution credibility during his tenure.
“He was a towering influence for anyone committed to regulatory independence and integrity in government,” said former Federal Deposit Insurance Corp. Chair Sheila Bair, who along with Volcker helped to form the Systemic Risk Council, a group of former regulators focused on risks to the financial system. “This is a heartbreaking loss.”
Former President Barack Obama echoed that sentiment in a statement, saying Volcker’s credibility matched his formidable 6-foot-7 frame.
“I’ll remember Paul for his consummate wisdom, untethered honesty, and a level of dignity that matched his towering stature,” Obama said.
Hoenig said Volcker's legacy was defined by his willingness to fight for his convictions.
“I was honored to have had known Paul and to have had the opportunity to in fact be led by him during some really difficult times in the economy and banking,” Hoenig said. “When I was an officer at the [Kansas City Fed], he led the system — the board and the banks — with courage. He was just a great, great leader. ”
