Is Volcker rule political posturing or perfect fix?

Since the bailout of Wall Street, the populist drum in Washington has been beating faster and louder. The outrage over executive pay is nothing new on Main Street. When taxpayer dollars used to save the skins of executives who put their companies in peril are now getting bonuses- the fury of Main Street can be understandable. In this “new normal” where many Wall Street legends like Peter Cohen are expecting a reshaping of the financial industry based on returning to an environment of a more client-oriented business, the Obama administration has set out an aggressive plan for Congress to reshape the financial system as we know it. But are they tackling the true root causes of the financial meltdown or are they pandering to populism?

Whether you agree with former Treasury Secretary Hank Paulson that one regulator should have total power or there should be multiple agencies overseeing the industry, many in the financial sector are urging Congress not to look at regulation through the skewed glasses of emotion and populism but with the facts. Proprietary trading did not lead us into this crisis. It was the layers upon convoluted layers of over-leverage filled with structure investment vehicles, credit default swaps, or collateral debit obligations and don’t forget sub-prime loans, that made the toxic asset soup that poisoned our financial system and sent it into ICU. Arrogance and greed were the secret ingredients for that financial dish.

It’s been roughly 15 months since the words “regulation reform” have been uttered and what does Congress and the administration have to show for it? Not much but lots of bashing banker talk. While these sound bites sound good on TV or in the paper, the negative comments can undermine public policy over the long-term because it is crushing the faith of the very institutions they are trying to “reform” and “rebuild.” It is agreed that something has to get done. The markets crave certainty and this overhang of reg reform is creating uncertainty. The proposed taxes on the banks is one of the biggest question marks hanging over the industry. The big banks that have already repaid TARP plus interest will soon be paying for the mistakes of the insurance and auto industry since they can not pay back their TARP money. The government like a private equity firm does deserve a piece of the upside if it guarantees deposits like it did in the case of Goldman. But with the bank tax, they have to look at the law of unintended consequences. The $117 billion the tax is hoping to generate will be taken out of the banking system which means that money will not be used for loans to grease the must needed dry wheels of credit. Not to mention the banks will pass over the cost of the tax on consumers.

The economy right now “is weighing the invisible hand of the markets and the visible fist of the government” as PIMCO’s Paul McCulley so eloquently puts it. The fears of the unknown on policy is churning investors emotions and making the markets volatile. Congress this week is looking at the fine balance of regulation reform as they hold hearings on the “Volcker Rule”. But with the Democrats just controlling 59 Senate seats, the fate of financial reform is not sealed. Senate Banking Chairman Christopher Dodd (D-Conn.) is under pressure to bring a bipartisan bill to the floor and he does not want to go “begging” for a 60th vote. The president’s plan is based largely on Representative Paul Kanjorski’s (D-Pa.) “Too Big To Fail” amendment which says we must not forget the lessons learned during the financial crisis. But unfortunately, ‘too big to fail’ is part of the lingo in today’s investing world. One off the big unkowns in the president’s plan is what would the new constraints on the size of a bank be? The timing of this proposal has Chairman Dodd harshly criticizing the plan. Its the how a bank would be allowed to fail and the specific steps the government would do to make sure the unwinding would not create another crisis like the fall of Lehman did that has many on both Wall Street and on Main Street worried. There needs to be clear, due process. We have found out the hard way of unwinding a company without a solid plan and it took many long, arduous months for the markets to recover and in some areas- still recovering.

So as the soap opera between the Democrats and Republicans continues in Washington, the spirit of capitalism tries to live on. In a free enterprise system you are always going to have downturns. CEOs are not just in business when it is a good time to do business. The challenge is to operate well during every part of a business cycle—no matter what the uncertainty. It will take leaders with ice in their veins to carry companies through the second worst downturn since the Great Depression. The “new economy” is all about finding and creating opportunities amongst that uncertainty. We’ll see new leaders emerge. Some say management leverage will replace financial leverage. Opportunities can be staring a CEO in the face, but if they don’t have the qualities to seize the day and are swayed by nay-sayers, than it is an opportunity lost.

Former FDIC Chairman Donald Powell sums up the market turmoil best, “You can’t get a rainbow until it rains.”

Lori Ann LaRocco is the Senior Talent Producer at CNBC and has the ear of some of the world’s biggest business minds.  She is the author of “Thriving in the New Economy”.