Paul Volcker Testimony Before Senate Banking Committee (Text/Video)

Paul Volcker testified before the Senate Banking Committee today on the proposed "Volcker Rule" which would ban hedge funds, private equity funds and proprietary trading inside commercial banks.

Full Video at Banking.Senate.Gov

Here is a portion of the prepared testimony:
"Third, I want to note the strong conflicts of interest inherent in the participation of commercial banking organizations in proprietary or private investment activity. That is especially evident for banks conducting substantial investment management activities, in which they are acting explicitly or implicitly in a fiduciary capacity. When the bank itself is a “customer”, i.e., it is trading for its own account, it will almost inevitably find itself, consciously or inadvertently, acting at cross purposes to the interests of an unrelated commercial customer of a bank. “Inside” hedge funds and equity funds with outside partners may generate generous fees for the bank without the test of market pricing, and those same “inside” funds may be favored over outside competition in placing funds for clients. More generally, proprietary trading activity should not be able to profit from knowledge of customer trades.

I am not so naive as to think that all potential conflicts can or should be expunged from banking or other businesses. But neither am I so naïve as to think that, even with the best efforts of boards and management, so-called Chinese Walls can remain impermeable against the pressures to seek maximum profit and personal remuneration." (full testimony)

Doesn't it all come down to risk management?  Small banks are failing just because of bad loan portfolios.  How do you regulate greed, giddiness and flawed risk models to prevent any of this from happening again in 2088?