MS. DIANE REHMThanks for joining us. I'm Diane Rehm. After three years of work, yesterday five federal regulatory agencies put their stamp of approval on the so-called Volcker rule, part of the 2012 financial reform law. The rule aims to reign in risky trading by banks. For what the Volcker rule means and its impact on banks and consumers, here with me is Michael Greenberger, professor of law at the University of Maryland, former Minnesota Gov. Tim Pawlenty, CEO of the Financial Services Roundtable, and, joining us from the studios at NPR in New York City, Jim Zarroli, business and economics reporter for NPR.

MS. DIANE REHMYou're welcome to be part of the conversation. I look forward to hearing your views, your thoughts. Join us on 800-433-8850. Send us an email to drshow@wamu.org. Follow us on Facebook or Twitter. And welcome to all of you.

GOV. TIM PAWLENTYIt's great to be with you.

REHMThank you. Thank you. And, Michael Greenberger, I'll start with you. Explain for us briefly what the Volcker rule is and what the issues were that Paul Volcker was trying to address.

MR. MICHAEL GREENBERGERWell, this actually goes back to the Great Depression. During the Great Depression, the federal government, to create confidence in the banks, decided to insure deposit in federal banks. And the theory was, if the government was going to insure deposits in those banks, they didn't want the banks involved in risky investments. And a very hard line was drawn. You either could be a commercial bank, which meant you did what our traditional view of banks is, make loans, et cetera, or if you were going to do investments, you didn't have insured deposits and you were called an investment bank.

MR. MICHAEL GREENBERGERIn 1999, that law was repealed by a law called Gramm-Leach-Bliley. And the theory was that it was outdated and that banks were sophisticated enough to be able to do more risky investments. When the meltdown occurred, the conventional assessment was that the banks were involved in too risky investments. Not only were they using insured deposits, but, when they failed, they went to what's called the Fed Window to get federal assistance. So Paul Volcker decided during 2009 that the Obama administration had not been aggressive enough in responding to this.

MR. MICHAEL GREENBERGERHe wanted to bring back some semblance of Glass-Steagall. And what he proposed is that banks should not invest for their own benefit, which today I think there are $44 billion in revenues coming from banks investing for themselves, not for their customers. And he wanted to draw a line that banks could do whatever they wanted to do, but they couldn't invest for themselves because the theory was it was a no-lose proposition for the banks, that if they won those bets -- which for a large time they did -- they took those home.

MR. MICHAEL GREENBERGERAnd we found out in 2008 when they lose the bets, the American taxpayer is called upon through things like TARP or generous loans from the Fed to bring them back to life. And Volcker said a bank should not be trading for their own account, with some very important exceptions -- which are complicated -- I'm sure we'll discuss. They can make markets for their customers. That is they can get investments in so their customers can do trading, and the banks can hedge their own risk exposure. There's some other do-dads, but that's basically what we've been dealing with.

REHMMichael Greenberger is professor of law at the University of Maryland. Jim Zarroli, how closely does the rule approved yesterday reflect the intent of Paul Volcker?

MR. JIM ZARROLII think it reflects it pretty much. I mean, you have to remember that Volcker, when he proposed this back in 2009, he basically just gave the bare outlines of what he thought should happen. Then it was included in the Dodd-Frank financial overhaul bill. But since then, really, the regulators have been trying to spell out in great detail exactly how this should work, what should be included in it.

MR. JIM ZARROLIThey were trying to delineate absolutely the kinds of trading that banks could do, when they could do it, you know, who they could do it for. So I think in general it hues to what Paul Volcker wanted, but there's just a lot more detail. It's more than 900 pages.

REHMI realize that. So how significant is this rule? Does it mean the end of too big to fail? Jim Zarroli?

ZARROLIYou know, I think there's some differences of opinion about that. I mean, I think people would -- I think we're going to wait and see. Too big to fail was addressed to great extent in the Dodd-Frank financial overhaul bill. This is something sort of different.

ZARROLIThis is going to really change the kinds of ways that banks can make money, what they can do, as I said, who they can trade for. And there are differences of opinion about what that will mean. I mean the banks say, look, we've already cut back on a lot of this, partly because we knew the Volcker Rule was coming, partly because the economy just isn't as roaring as it was. So we're not doing that that much already.

ZARROLII think the proponents of the Volcker Rule would say, well, yeah, you're not doing it now, but times change, the economy changes, we go through cycles. There could well be another time when the economy is really hot again. And then banks will be tempted to do some of the things and this will make that harder.

REHMAnd turning to you, Gov. Pawlenty, how does Wall Street see the Volcker Rule?

PAWLENTYRight. Well, I think Michael and Jim did a nice job outlining the purpose and intent and history that led up to the Volcker Rule. And I represent the Financial Services Roundtable, which is not only just some of the big banks, but also some regional banks, some mid-sized banks and other kinds of financial service companies spread across the whole country.

PAWLENTYUpon further review, it looks like this rule, on its face, strikes the right balance between these competing dynamics that Jim and Michael described. It ends proprietary trading, which I think most people would say was directionally appropriate.

REHMDefine proprietary trading.

PAWLENTYWell, it's what Michael said earlier, which is in oversimplified terms, banks taking money that they have available to them and trading it for their own benefit or profit. That's oversimplified, but that's basically it. So the Volcker Rule prohibits that kind of trading, but subject to important exceptions that people recognize are important for the economic system and financial system to work. For example, something called market making, where banks essentially act as matchmakers between buyers and sellers of securities or positions.

PAWLENTYThe Volcker Rule allows that. It allows hedging, but subject to specific oversight and review in the future. And a lot of that, by the way, Diane, is yet to be filled in. So as we talk about, well, hedging is appropriate -- because if you're a bank and you take a position, say, on behalf of a customer while that transaction is going to clear and there's some risk it could go up or down, you want to hedge against that risk while you have it, while you have that position.

PAWLENTYThat's probably a good thing if it's done correctly and wisely. So overall and directionally, we think the Volcker Rule looks like it's headed in a good direction with a lot of details to be followed. But here's just a few things to keep an eye on. One is compliance cost overall. So as these compliance costs mount, where are they going to shift to and how might that affect, you know, the investors, the people who invest in banks, including retirees and 401 (k) holders.

REHMWhy are compliance costs going to be so significant?

PAWLENTYWell, if you look at the rule, it's over 1,000 pages if you include the preamble and the footnotes and the like. The rule itself is only around 100 pages, but there's going to be increased oversight, increased reporting, increased transparency, all of which may have some benefit, but it clearly is going to add costs and those costs have to be shifted to somewhere. Number two, you know, our international competitors don't have a rule like this yet.

PAWLENTYSo as many of our larger financial institutions compete globally, if there are customers or investors want to be attracted to institutions who have an advantage -- international companies, at least for a while, have that kind of advantage. And then a third thing to keep an eye on, this relates to the regulated space. And so some of these activities overall could shift to the unregulated or so-called shadow banking space.

PAWLENTYAnd then, finally, as proprietary trading ends from banks, that's going to probably have a net reduction in trading and investment overall. Again, I think a good thing to reduce or eliminate proprietary trading, subject to exceptions, but it is going to reduce capital flows because banks and institutions aren't going to make these kinds of trades anymore. And that's going to have an effect on the economy as well.

REHMFormer Minnesota Gov. Tim Pawlenty, he's CEO of the Financial Services Roundtable. If you'd like to join us, give us a call, 800-433-8850. Send us your email to drshow@wamu.org. Jim Zarroli, did the situation with JPMorgan make it easier for regulators to write a tougher rule, here? What's your thought?

ZARROLIOh, yeah, I think it definitely did. I mean, that was a huge story, got a lot of attention. You know, a lot of people wondering, you know, here's what's considered the best run bank in the country, you know, headed by Jamie Dimon, who's revered in the industry. And these traders were doing these things and costing the bank a lot of money, and nobody understood what they were doing.

ZARROLIYou know, their bosses didn't understand, and even Jamie Dimon came later and said, I didn't see this. So a lot of people thought, you know, if this can happen to JPMorgan Chase, you know, we have to address this. This is really risky. We have to watch more carefully what banks are doing with the money they have on hand.

REHMJim Zarroli, he's business and economics reporter for NPR. When we come back, we're going to talk further about some of the issues Gov. Pawlenty has raised, for example, compliance with such a technical bill, 900-plus pages in all, and whether Wall Street itself will be searching for ways around this. But right now, a short break. We'll be right back.

REHMAnd welcome back. We're talking about the Volcker Rule which, after three years, was finally approved by five regulatory agencies. And we shall see where it goes from here. Here in the studio with me, former Minnesota Gov. Tim Pawlenty. He's currently CEO of the Financial Services Roundtable. Michael Greenberger is professor of law at the University of Maryland.

REHMJim Zarroli is on the line with us from the NPR studios in New York. He's business and economics reporter for NPR. And from Twitter, we have this question which I think a lot of people are asking. "At 900 pages for the Volcker Rule, wouldn't it have been simpler to reinstate Glass-Steagall?" What do you think, Michael Greenberger?

GREENBERGERThe short answer is yes, but a longer answer is that it was a real battle, even in the Obama Administration, to get the Volcker Rule that is a small version of Glass-Steagall to come to fruition. Michael Hirsh and the National Journal today has a blog saying that Volcker really had to fight Larry Summers and Tim Geithner, the Secretary of the Treasury and Obama's Chief Economic Advisor to get...

REHMAt the time.

GREENBERGER...at the time to get them to agree. And when Scott Brown beat Martha Coakley and the Republicans took Ted Kennedy's seat, when they analyzed the data, Democrats were upset with the administration because they weren't being tough enough on the banks. And so the president -- this came from the president not from Congress -- the president with Paul Volcker decide (sp?) in January of 2010 announced this rule. And the Volcker Rule as announced was three pages long.

GREENBERGERAnd Paul Volcker believes that those three pages would've done the trick. But there were so many complications of defining, hedging, market making and frankly a resistance, I believe, by Secretary Geithner and Larry Summers to even getting it into Dodd-Frank that it was a very hard push. It's true that you've got hundreds of pages, but the rule is 71 pages. The other pages are explaining how they got to where the rule is.

REHMAll right. And, Jim Zarroli, in looking at Jim Geithner's role, I gather that when Jacob Lew came in as Treasury Secretary, he was far more in favor of the Volcker Rule.

ZARROLIYeah, and I think there probably were people in the administration who, you know, wanted to see -- certainly favored the Volcker Rule. You know, one of the problems they faced of course was congress. I mean, I know a lot of people would like to see the Glass-Steagall rule -- Glass-Steagall reinstated. You know, especially on the left that's sort of the Holy Grail. I think in the current political atmosphere that's kind of just not going to happen.

REHMExactly.

ZARROLIAnd it certainly -- whatever the White House wanted to do, you know, they had to think about what it was going to get through Congress.

REHMAnd here's an email from Shannon who says, "I am a loan officer at the largest credit union in Ohio. Please talk about the impact of the Volcker Rule on credit unions and their members," Gov. Pawlenty.

PAWLENTYWell, if I might, Diane, just jumping back to the comment about Tim Geithner, in fairness to Secretary Geithner, I was under his watch as they promulgated an earlier draft version of the Volcker Rule, which was frankly much more controversial and contested than the final rule that came out yesterday. So I don't think it would be complete to say that Secretary Geithner, you know, was unwilling to have a hand in promulgating or advancing a Volcker Rule of some type. Because obviously that was done and promulgated, or at least proposed.

REHMBut let me interrupt you just there. You said earlier, Michael Greenberger, during the break that had this been enacted six or eight years ago...

GREENBERGERWeeks.

REHM...sorry, weeks ago, it would not have been as strong as it is now. How come?

GREENBERGERWell, you know, you've made the statement that Jack Lew came in, and he was much more aggressive. Jack Lew's a very progressive guy, and he's a very rational guy. But he admitted that he did not understand financial markets. And when he came in, I think a lot of us who were advocating for Volcker weren't completely sure where he would come out.

GREENBERGERIn the -- well, I would just say, last week Secretary Lew made a dramatic speech at the Pew Charitable Trusts where he adopted not only on Volcker but on all sorts of contested issues where he came down on the side of regulatory reform advocates.

GREENBERGERAnd I think there's an unsung hero in all this, Gary Gensler, who's the chair of the CFTC and will be leaving his job, been there for five years. And he not only had impact on making Dodd-Frank more favorable to the American taxpayer, but he fought a battle and finally convinced Lew and others that the rule had to be stronger than they were originally going to make it.

REHMAll right. Going back to the credit union...

GREENBERGERYes. On the credit union issue and I'll just also say on the point of Glass-Steagall you have many prominent people including some prominent people on the Democrat or left side of the ledger saying the repealed Glass-Steagall didn't fundamentally cause the crisis. You know, for example, Lehman and Bear Stearns were essentially self-contained investment banks. And they were one -- or two of the leading examples of what went wrong and what imploded and contributed to the crisis. And they weren't commercial banks. They were investment banks.

GREENBERGERSo at least as applied to them and others, Glass-Steagall would not have, you know, prevented that. But as to credit unions and smaller community banks, the rule itself purports to provide relief and exemptions for small institutions. Now I don't know if the caller or the person who's tweeting's institution would fall under that level or not, but there's a -- seems to be a fairly significant exemption or latitude for smaller financial institutions.

REHMBut does that mean credit unions necessarily...

GREENBERGERThat I can't answer offhand, I'm afraid, Diane. I'd have to -- I'm not comfortable answering that.

REHMOK. Jim Zarroli, any thoughts on that?

ZARROLIYeah, I don't know either.

REHMOK.

ZARROLII mean, my sense is that this is sort of -- the bigger effect is going to be on really big banks, but I don't know (unintelligible).

REHMOK. And, Jim Zarroli, the question for many people who've been watching this is, is Wall Street simply going to use that 900-page addendum explaining everything that's in the Volcker Rule to find ways around the Volcker Rule? What is your thinking?

ZARROLIWell, I think that's a fairly safe bet. I think that's what Wall Street banks do, you know. And they're not alone in that. I mean, they look at laws and they try to find loopholes. They try to stay within the law but -- you know, presumably, but, you know, look for ways to get around it. I don't think that's unusual. I think they're surely going to do that. There's a lot to this rule.

ZARROLII think they -- one of the reasons it's so long and it's in such detail is the regulators were trying to spell out -- you know, they were trying to prevent that. They were trying to say this is what you can do exactly and this is what you can't do. But, you know, if history is any guide, we know that people try to look for ways around that. And I think it's a pretty safe bet that the banks will do that.

REHMMichael Greenberger.

GREENBERGERWell, as a world class skeptic, I'm going to tell you that I have a high degree of confidence that the rule will be enforced. And this goes back to my point, there's been a sea change in the regulatory atmosphere, even in the Obama Administration. And not just looking at the Volcker Rule, but looking across broad array of enforcement activities, there's been a much tougher stance. Now, I don't think they're going to be hostile to banks. I don't think they have it in for banks. But I do think they will enforce the rule as it's set out.

REHMJim Zarroli, five agencies approved this rule. Who is going to enforce it? Gov. Pawlenty raised that question. Can it be enforced, but who's going to do the enforcement?

ZARROLIWell, I mean, there were five different agencies that signed off on this. I mean, you know, the regulatory infrastructure is pretty complex. I will say to what Michael said that I agree with him that there has been a sea change, that the Obama Administration would very much like to take this -- would very much like to see this succeed. The question is always, what's going to happen in the future?

ZARROLII mean, we're going to get a new administration coming in. Are they going to be as committed to that? We don't know, you know, who's going to be in the White House in a few years. We don't really know. And that's always the question. I mean, if -- you can have these regulations, but if the people in the White House don't really, you know, want to see it succeed or, you know, they're kind of lukewarm about it, then they don't have to enforce it very aggressively.

REHMGov. Pawlenty, are court challenges on the way?

PAWLENTYThat's unclear, Diane. I think there were some speculation that if the rule came out in an unreasonable fashion that there might be court challenges and there still might be in isolated subparts to it. But at least as we sit here today, there isn't any known plans or activities in that regard. I think again, directionally the industry is saying, you know, ending or winding down proprietary trading makes sense.

PAWLENTYThey just want to make sure as we work through the appropriate exemptions that the rules of the road are clear and that there's not uncertainty. Because if there's uncertainty you stumble into violations or you are hesitant or deterred from actually making markets or engaging in economic activity. And that doesn't serve anybody's benefit.

REHMDo you think banks are complying even now?

PAWLENTYWell, many of the banks, not all of them, got out of proprietary trading or are winding down their proprietary trading operations, as you noted earlier, in anticipation of Volcker Rule or because they just thought it was an unwise business practice. And so many of them kind of vacated the space quite some time ago.

REHMBut, Jim Zarroli, you've reported it's easier for banks to comply when the economy is just sputtering along. That could change if we see another boom?

ZARROLIYeah, it certainly could. I mean, just remember a few years ago what the mood was like. And it wasn't just in, you know, bank -- I mean, all kinds of credit were just taking off. When there's an atmosphere like that, people, not just banks, but everybody kind of looks around and sees opportunities, and they see people making money. And they say, gosh, I want to get in on that. So the mood can change pretty fast.

REHMAnd, Michael Greenberger, two-thirds of the regulations under Dodd-Frank remain unfinished. That ever going to get done?

GREENBERGERYes, it will get done. Let me say about that, as a former financial regulator, they had 389 regulations that needed to be promulgated. I was at the little CFTC, which is a few hundred employees, and has now got responsibility for $300 trillion (word?) value financial derivatives. And it's not been helped by its appropriations and the cutback. But I think this can be properly enforced. It will be properly enforced if we have appropriate financial support for our regulators.

REHMMichael Greenberger, professor of law at the University of Maryland, and you're listening to "The Diane Rehm Show." Time to open the phones. First let's go to South Bend, Ind. Hi there, John, you're on the air.

JOHNHi, Diane. How you doing? You rock.

REHMThank you.

JOHNI just wanted to ask two questions really. How much money did the American taxpayer waste on AIG and how can you call what the casino, that is Wall Street, a free market because you can buy insurance on a million dollar bet? There's no way you can lose.

REHMMichael.

GREENBERGERWell, I mean, that A. that's absolutely right. I think my memory is that we bailed out AIG to the tune of $185 billion. By the way, most of that trading was done by a subsidiary in London because there are lots of issues now about whether U.S. Bank holding companies, when they operate abroad, should comply with Dodd-Frank.

GREENBERGERBut be that as it may, the big issue here or the big event here was the London whale trades made in May of 2012 when JP Morgan, as we said previously, thought to be the most sophisticated of all the banks and who got through the prices in 2008, found out that one trader had lost them $6.2 billion. And as Gov. Pawlenty said, even Jamie Dimon at one point said, if there had been a Volcker Rule, this probably would've stopped.

GREENBERGERNow, the minute that loss was announced, a lot of the banks and their representatives said, that was a hedging event because we were hedging. What were you hedging? Well, our general portfolio philosophy. And that issue got resolved favorably to the advocates of the Volcker Rule because now if you're hedging you can't just say I'm hedging a broad general exposure. You have to identify what you're hedging. And I think that's one of the things that came out of this rule that was a late last-minute change that is very beneficial.

REHMGov. Pawlenty.

PAWLENTYYeah, I think John expresses a sentiment, Diane, that is shared by everybody which is, look, we don't -- we shouldn't have any institutions that are too big to fail. There shouldn't be any future bailouts and we shouldn't have enterprises that are too big to prosecute or jail. We all agree on that, so the answer so far from the best policy makers at the time was Dodd-Frank. And at least as it relates to future subsidy, it says on its face, we're not going to have taxpayer-funded bailouts of these institutions in the future.

PAWLENTYBut you do have people, policymakers included, saying, you know, we don't believe that. Even though I read it, even though I see it, you know, in the law written onto the paper, we don't believe that if one of these things tumbles in the future of course the pressure will mount and there'll be some kind of bailouts.

PAWLENTYThat all being said, I think, these changes directionally under Dodd-Frank while a lot of the details are yet to be worked out, the Volcker Rule, are all designed to reduce the probability of the kinds of shenanigans and problems and unwise practices that contributed to the crisis of 2008 and before and subsequent.

REHMAnd the question becomes from your perspective, how well do you think it will work to rein in those who feel, well we can still hedge here, we can still hedge here, without the regulation imposing itself?

PAWLENTYYes. Well, so again, listeners -- of course there are terms that are probably unfamiliar to a lot of your listeners but we should distinguish between proprietary trading, which is banned under the Volcker Rule...

REHMRight.

PAWLENTY...and then something called hedging which is appropriate. So if Michael, you know, is going to be a market maker -- let's say he's Michael's bank, and I'm his customer. And I'd like him to buy securities on my behalf and build a position for me. You know, he's got some risk as he builds that position for me.

PAWLENTYYou know, he may want to hedge against the price of that going up or down during the short period of time while he's the owner of record. That's probably a good thing. It reduces risk rather than having him be just totally exposed to those kinds of price fluctuations. Even if he holds it for as little as a day or a half a day. So that's appropriate hedging.

PAWLENTYNow I think what everybody's thinking about is, since these rules are not clear as to what's appropriate hedging or not, the regulators in the future are going to have to oversee that, work that out, define it. And that creates some uncertainty and nervousness.

REHMFormer Minnesota Gov. Tim Pawlenty, CEO of the Financial Services Roundtable. When we come back we'll talk further about these issues, take your calls, your email. I look forward to speaking with you.

REHMAnd welcome back. Just before the break, we were talking about an example of hedging. And, Michael, you've got a good one.

GREENBERGERYeah, well, I just wanted to say that for people who are worried about these terms, hedging and market making, I think the rule came out in a way that is very protective of the American taxpayer. On hedging, the class hedge is the bank makes a loan to a company and they're worried that the loan won't get paid back. So they can buy, in effect, insurance that will pay them if the loan doesn't get paid back.

GREENBERGERNow, what they were worried about was you had the London whale where they were betting billions of dollars on abstract who would fail -- what series of companies would fail. And you couldn't tie that back to any risk that the bank had.

GREENBERGERAnd what happened in the last few weeks was it was reported the rule was going to come out to say that the London whale kind of hedge was OK -- the London whale kind of hedge was OK. And now what it say, no, no, bank. If you want to hedge you can hedge but you have to give us information about what it is you're hedging, which they could not do in the London whale case.

REHMGovernor.

PAWLENTYYeah, I think that's a good summary and, you know, the -- prior to this rule coming out you could hedge against what was called macroeconomic conditions. So you could say, you know, we've got a specific hedging place against some general notion of whether a large macro indicator's going to go up or down. Now, the change is you can hedge but you've got to identify the specific risk you're hedging against. And by the way, the regulators are going to oversee that and then make some determinations about whether it's properly in scope.

PAWLENTYAnd I would suggest to you, Diane, this is where most of the remaining interpretation and enforcement and application work is to be done in the rule. You know, this is a big area where the rule of the regulator still is, you know, going to be forthcoming.

REHMOK. Let's go back to the phones. Let's go now to Cleveland, Ohio. Hi there, Rita, you're on the air.

RITAHello. I'll try to be brief.

REHMPlease.

RITAI was a real estate broker for a long time, and then I was an appraiser. And when 401Ks came in, before that people saved their money locally in Savings and Loans and so forth and they had IRAs, which stayed local and were there for home loans or whatever in the community. And then we got 401Ks, and everything went immediately to Wall Street. So I would say that most of what we're talking about, things are designed to confuse.

REHMDesigned to confuse?

RITAIt just tells me I'm too stupid to understand this. That puts a red flag up for me.

REHMI understand your concern. Michael.

GREENBERGERYeah, I think this is a very natural response. And let me say, not just progressive Democrats, but Sen. McCain and Sen. Vitter from the Republican side of the aisle want to make this very simple. Their view is if you're a bank you make loans and you don't do anything else. What is that? That's reinstating Glass-Steagall. It's not a partisan issue. You find Tea Party representatives and Occupy Wall Street representatives who have an instinct to want to go back to Glass-Steagall and end the confusion.

GREENBERGERIf you walk into a bank and you have a deposit in that bank and it's insured, you know that that bank isn't making any kind of investments. Now it's been said here today that that's a hopeless effort. But let me tell you, there's -- as I said, the Tea Party and the Occupy movement, Sen. McCain and Sen. Cantwell, Sen. Vitter and Sen. Brown want to make this clear cut distinction.

REHMAll right. Here's an email saying, "If the banks are not doing this much anymore, then why was the president of the American Bankers Association on the news hour last night vehemently opposing this law on grounds it would limit the capital they could loan? Isn't getting basically free money from the Fed good enough for them," Tim Pawlenty?

PAWLENTYWell, just to the previous caller as well, Diane, you know, the Savings and Loans that were referenced, people should remember they all went bankrupt, and we had a major crisis around them some 20-plus years ago. So -- and then in terms of deploying money in a world where markets are national and international, you want to go where you can get the best return.

PAWLENTYSo I don't think you'd want to artificially restrain people's options for investing within a tight, you know, geographic area. Because obviously if you've got money in your 401K, I think you'd want to seek returns, whether the best returns are in, you know, different parts of the country or perhaps different parts of the world.

REHMBut at the same time, when you knew your local banker, when you could rely on that bank to be there for you, when you had a personal relationship it did make a difference in how you felt about where you were putting your money and whether it was going to be there.

PAWLENTYSure, sure. Of course. And there's something to be said for that and we support, of course, relief and easing of burdens on local banks and community banks. They play an important role in the banking and finance system. We need banks of all sizes, community banks, local banks, midsize banks, regional banks, big banks, global banks because different customers have different needs. So we need them all and we appreciate that.

PAWLENTYKeep in mind that one of the root causes of the crisis was poor underwriting of loans. And so when you get into kind of reputational lending, sometimes personal impressions can, you know, blur the lines between what's appropriate standards and what's kind of a friendship-based lending.

REHMSo where does the American Bankers Association (unintelligible) ...

PAWLENTYWell, I think I don't want to -- Frank Keating, the head of the American Bankers Association in the ABA issued a statement yesterday relative to Volcker Rule that was expressing concern. And then he subsequently did a couple of media appearances where he said, look, we have concerns about the implementation like I've expressed here this morning, and the compliance costs.

PAWLENTYBut he was thankful for the exemption for small banks in particular, but also identified this uncertainty around how regulators are going to enforce hedging going forward. So I think they did issue a skeptical statement but he's explained that more in subsequent interviews. And there is, you know, still reason for banks to be at least wondering how this is going to be enforced and how much it's going to cost to comply.

REHMJim Zarroli, any comment?

ZARROLIYeah, I mean, I would want to just change the subject a little bit. I just want to kind of give a nod to Paul Volcker. Boy, what an extraordinary career he has had. I mean, he is -- if you're old enough to remember the late '70s as I am, he -- that was the time of really bad inflation. And if you lived through that it was kind of searing. And I think a lot of the people now who are expressing so much concern about what the Fed is doing, are people who remember that time. I mean, you just don't forget it.

ZARROLIPaul Volcker was the man as Fed chairman who really tamed that. And we have not had inflation since then. And now at the age of 86 he's come in and, you know, been the sort of driving force behind this major rule that's going to really usher in a new era for banks. I mean, it's pretty extraordinary.

REHMAll right. Let's go to, let's see, Donny in Tampa, Fla. You're on the air.

DONNYGood morning. I wanted to ask Gov. Pawlenty if he could explain why when Glass-Steagall was repealed and banks were able to bring in profits in that time period when it was repealed and before the crash, of $44 billion? And at the same time, it was worldwide common knowledge that personal savings dwindled far too much to indicate a healthy economy and healthy economic policies by households.

CAROLWhy is it that banks didn't share some of the 44 billion with their passbook depositors when those accounts were earning next to nothing and still are? While at the same time, fees for things like overdraft and incidentals absolutely skyrocketed while they were making billions from the other sources that were unregulated?

REHMGov. Pawlenty.

PAWLENTYWell, I'm not sure I understand his question, although I think it relates to the banks were making a lot of money before the crisis. Why didn't they give a higher rate of interest or return to their depositors or their customers. And I think obviously that's a market where people can decide where to put their money for what return and what degree of risk. I do want to return though to the broader issue of Glass-Steagall which has been mentioned here a few times.

PAWLENTYAgain, one of the red causes of this crisis was poor underwriting. Fannie and Freddie were not a commercial bank or an investment bank. Bear Stearns and Lehman red causes of the crisis were not -- you know, wouldn't have been affected by the return of Glass-Steagall. Long-Term Capital was a hedge fund which was one of the problem entities that got bailed out. You look at WAMU and Wachovia, those were commercial banks, not particularly investment banks. And people...

REHMNot WAMU.

PAWLENTYYeah, and then -- so but even Elizabeth Warren, kind of the leading advocate for the return of what she calls the modern day Glass-Steagall has said, it wouldn't have prevented the crisis. So again, we can argue Glass-Steagall or not. I just want to make the point that most people would conclude that the existence of Glass-Steagall's framework would not necessarily have prevented -- in fact, (unintelligible) wouldn't have prevented the crisis.

REHMAll right. To Carol in Dallas, Texas. You're on the air.

CAROLGood morning. I was just wondering, when you keep talking about the regulators enforcing the rules, etcetera, this sounds sort of like the way things were when we were having so much Medicare fraud. But yet no one was really investigating. Then suddenly they put a push on it and started really making some progress on some Medicare fraud cases. What's going -- why can we not hire experienced people to work with -- inside these agencies that can actually try to drill down and get the details to where they can figure this out before it happens?

REHMAll right, Carol. Thanks for calling. And one aspect I would think is the number of personnel you've got doing this enforcement, as Gov. Pawlenty has spoken of.

GREENBERGERWell, in the same breath that President Obama praises the Volcker Rule he says, we've got to fund our regulators. And that is a serious problem right now.

REHMAnd is congress going to be willing to do that?

GREENBERGERWell, obviously that's really up in the air. For example, the CFTC, which has $300 trillion of responsibility notional value in this thing, has like 600 employees. And their budget is being cut, cut, cut. There's a movement that the CFTC should be funded not by Congress but they should tax a small part of that which they've regulated, which is the way the fed operates or the FDIC operates.

GREENBERGERBe that as it may, I -- Diane, you know I've talked about Dodd-Frank and regulatory reform and I'm an advocate for the most strict regulation there is. I have optimism about this. One of the reasons I have optimism about this is Gov. Pawlenty's very moderate discussion about what banks are going to do...

REHMWell, his discussion is moderate but the American Bankers Association has a very different perspective.

GREENBERGERI know Frank Keating and I think he was off message. And this is why he was off message. If you don't have the Volcker Rule or if the Volcker Rule isn't enforced and you have another London whale, the American people rightly or wrongly are angry at the banks. They believe the banks caused the crisis, rightly or wrongly. They believe the banks were subsidized at the end of the crisis and now they're in better shape than anybody is. And the rest of the American economy is on its back. So one more false move and rationally or irrationally we're going to have Glass-Steagall come back.

REHMMichael Greenberger, professor of law at the University of Maryland, and you're listening to "The Diane Rehm Show." Gov. Pawlenty, do you agree?

PAWLENTYThat I'm listening to "The Diane Rehm Show?"

REHMNo. Do you agree with Michael?

PAWLENTYI think Dodd-Frank is settling in. There's work left to be done. But if there were one or more other big crises, big implosions, you know, that were contributed to bad behavior by large financial institutions, I think you'd see a whole other rash of actions by the legislature (unintelligible)...

REHMBut haven't we had enough already? That's the question.

PAWLENTYYeah, but we shouldn't forget how much has been done. So, you know, the response at the time of the people who were at the helm at the time, the answer was Dodd-Frank and its regulatory progeny, including the Volcker Rule. And by the way, it says too big to fail has ended. No more taxpayer bailouts. We're going to have orderly wind down. And by the way, if you fail, you fail. Your shareholders are going to get wiped out.

PAWLENTYYour executives are going to be taken out and no more bailouts. And then people look at that and say, I don't believe it. We've got to do something else, something more. So I think the regulators are saying we believe that Dodd-Frank will work but if there's continued concern we'll do even more.

REHMJim Zarroli.

ZARROLIYeah, if I could just go back to what the caller said, she said why -- I think something, why don't we have experts on-hand to...

REHMRight.

ZARROLIBut, you know, I think you could make the argument that we did have experts on-hand. There were regulators during the subprime mortgage prices. There were people on hand at the big banks. And they didn't do anything. They didn't do -- well, they didn't do enough. They didn't see this coming. They didn't try to stop, you know, bad mortgage underwriting because of the -- you know, you could say because of the times. I mean, a lot of people didn't see the crisis coming. They thought the good times were going to last forever. And, you know, we need regulators but we need good ones who do a good job.

PAWLENTYCould I just say that the red cause of the crisis in part was poor underwriting. And if you look at the cabal of interests that are behind more in the housing market, it always get pushed under the banks. But keep in mind, there's a whole parade of other actors here that advocate always for more. From the business side it includes of course realtors, developers and the type and all the suppliers and builders.

PAWLENTYBut on the left it's a whole array of housing advocates, affordable housing advocates, more housing advocates. You put all that together and there's pressure on the system to always have a forward-leaning posture in housing. I think Dodd-Frank and its regulations have tried to address that, but it is not just, you know, banks. It is a whole parade of characters who are pushing on these issues.

REHMMichael, didn't Sheila Bair try to call this whole thing out?

GREENBERGERAbsolutely. She was at one point -- people forget -- she was George W. Bush's first assistant secretary of the Treasury. And she went to Alan Greenspan and said, you've got a problem here. One of the members of the fed went to Alan Greenspan. But the environment prior to the meltdown was housing prices are going to go up.

REHMIt's fine.

GREENBERGEREverybody's going to win. If you can't afford your house, it will appreciate in value and you will afford it. And that's been driven out of the system right now. And I think part of the reason banks are getting out of this business is they, like everybody else have learned, they're going to get in a lot of trouble if they keep doing this crazy underwriting or investing.

REHMJim Zarroli, final question, and please be brief. Are consumers better off now that the Volcker Rule is approved?

ZARROLIWell, I think you could make the argument that we're all better off if this succeeds in, you know, preventing a -- the kind of an economic catastrophe that Paul Volcker was warning about. So, yeah.

REHMWell, let's hope so. Jim Zarroli, business and economics reporter for NPR, Gov. Tim Pawlenty, now CEO of the Financial Services Roundtable, Michael Greenberger, professor of law at the University of Maryland, and I thank you all for being with us. And thanks for listening. I'm Diane Rehm.