Volcker: Bernanke Didn't Go Far Enough

Paul Volcker saw Barack Obama as an "agent for needed change" when the former Federal Reserve chairman endorsed him for president in January 2008. But lately Volcker has been feeling a bit ignored by the White House, and thinks that Obama isn't changing Wall Street enough to avert another subprime disaster. Last week the current Fed chief, Ben Bernanke, came up with a proposal to make big banks behave: he pledged to change the way the nation's top 28 banking companies pay their executives, removing incentives for short-term gains and "working to ensure that compensation packages appropriately tie rewards to longer-term performance."

But Bernanke didn't go nearly as far as Volcker says we should. Volcker wants to keep major commercial banks that enjoy federal-deposit guarantees away from big-time speculative trading. "They shouldn't be doing risky capital-market stuff," Volcker told NEWSWEEK before the Fed announcement. But, he adds, the president "obviously decided not to accept" his recommendations. Volcker says he was used as "some kind of symbol of responsibility and prudence" by the administration during the campaign, and now speaks to Obama only occasionally. A White House official, who didn't want to be named talking about personnel issues, says Obama pays close attention to Volcker—and other dissenters, like Mervyn King, the Bank of England governor who also called last week for substantive structural changes to banks considered "too big to fail." "The president has a great deal of respect for Paul Volcker; he has met with him more than a dozen times in the White House, and seeks his input frequently," the official says.

The Fed's scheme was designed by Fed governor Dan Tarullo, an Obama appointee, but was adopted without administration input, says a Fed official who requested anonymity to discuss internal deliberations. The official adds that Bernanke's proposal is intended to address "the same issues of safety and soundness" that concern Volcker. In addition to the Fed's rollout, last week Treasury official Kenneth Feinberg said the government will restrict compensation of the top 25 employees at bailed-out firms; Obama also urged the Senate to give shareholders "a voice" on executive pay. Volcker says he agrees with "about 80 percent" of Obama's financial proposals, but it's the other 20 percent that has him worried.