The director of Goldman Sachs' largest hedge fund has departed. He was one of the few people at the firm who made $100 million in annual bonus back in 2006. We're now seeing a very clear pattern of talented people at i-banks leaving due to democrats' manic obsession with controlling the financial industry and imposing limits on the banks' ability to engage in prop trading and hedge fund activities. Of course, prop trading was not responsible for the economic crisis, but don't say that to Obama and his liberal cohort.
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I think you are mistaken in several ways. Prop trading was responsible for the banks balance sheets being full of MBS and CDOs. And as for GSAM people leaving... perhaps one should look at their recent performance to see the real reasons...
Actually you're wrong OP, prop trading is why these banks had/have billions in toxic assets, which is the reason they suffered huge write-downs and losses and ultimately led to a huge liquidity problem...i.e. see bear stearns and lehman.
Bear sterns and Lehman had excessive risk taking practices. They overdosed on their own supply and were largely negligent to the warnings of their best market analysts. Dick Fuld was a trader, he believed in risk and it had worked all these years, but his firm along with bear sterns and a few others were holding too much Mortgage securities when banks like morgan stanley, DB, and goldman sachs were creating and holding to swaps that helped them profit/limit losses in the bad market.
Maybe we do need some regulation, but too much will and should be opposed. Politicians are annoying.
The above views are all ridiculous and indicative of the sort of idiocy that is being espoused by Paul Volker, and has been espoused by those who are too clever by half for far too long.
LEH and BSC both took risks, but so does every bank, by definition. Reductio ad absurdum, If we rely on your definition of "prop trading = risk taking," if a community bank lends $100k to a home-buyer, unless that loan is completely hedged, they are engaged in prop trading. While that might look good in your little balanced equation, it is not how banks make money, and it is not how they ever have or ever will. Not only will it eliminate profits, it would almost undoubtedly dramatically escalate fat-tail risk.
Essentially, Paul Volker would like to ensure that no bank is net long any position at any time, and evidently so would the above commenters. Essentially, this would revert everything to agency trading. For liquid markets, that would kill any measure of profitability; for illiquid markets, it is an impossible proposition. While the Volker rule might do little to eliminate market risk, it will do plenty to destroy the American financial system (and that of any country foolhardy enough to follow our lead).
Drexelalum, I suggest you read the report on lehmsns bankruptcy published today. In it, there is clear evidence stipulating the fact that Lehman took too much leveraged risk, even going over internal limits. The bank lending 100k has the house as collateral to sell, wtf does Lehman have? the bank also has bank deposits to fall back on but Lehman's case was bigger and more dangerous, no one will lend to or deposit funds in Lehman when they are writing off billions in toxic assets and reporting 3 billion quarterly losses. Bank, for the most part, lend to worthy individuals, sub-prime lenders got burned and that was that. I'm not for regulation, you got me wrong. Infact, I dont think highly ov Volcker or his rule, he's starting to sound senile. However, the current system is not perfect either, the government should not have let things like "ninja" loans come to life EVER.
I was hardly defending Lehman, or saying they didn't make mistakes. I was saying that what they did, taking a ton of leveraged risk, violating internal controls, changing their accounting practices, etc, should hardly be seen as an indictment of risk taking in general. By equating Lehman's risk taking with prop trading, as the first two responses did, you buy in to a ridiculous narrative. Simply because Lehman took bad risks, doesn't mean we should ban all risk.
the best and the brightest will always leave the big IBANKS for HF where they can make more and arent as regulated
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Drexel, you misunderstood my view. I am AGAINST any regulation limiting prop trading activities, it's a possible career path for me. What I meant was risk taking involving the creation of toxic assets like ninja loans and then retaining a large amount of these assets on the balance sheet of the bank. That is ludicrous.
I think this is definitely the beginning of a trend that is going to continue going forward...
i think the activities should be permitted, however with higher capital and liquidity measures in order to provide larger cushions (the banks arent going to regulate themselves)...furthermore, the use of the repo market needs to be regulated as well...short term financing to pile on junky long term assets is a recipe for failure. If banks choose to use this recipe, they should be allowed to fail; not bailed out.
I don't think that it was prop trading desks that piled on "toxic" assets. IMHO the trouble came from originating. You had bankers originating ABS 24 hours a day, but they could only sell the senior tranches and - sometimes - the most junior stuff to hedge funds. No one wanted the rest, so they had to hold on to what was in the middle. A lot of it.
If you build up a big position and you can't or won't offload it, you begin putting on prop risk. It doesn't matter if the position came about because of your flow business, your investment banking or debt underwriting etc... pnl doesn't discriminate how the position came to be.
Anyway, back to the OP: since the beginning of time, "talent" has left bulge brackets to start HFs. Some have succeeded, most have failed. I don't really see what impending regulation has to do with it. A lot of internal HFs/ prop desks have not made money in the last 2 years.
Also, this guy is based in London. What do you think happened in London this year? 50% bonus supertax... I wonder if that is Obama's fault too?
Plus, prop trading is no different from any other trading when it comes to bringing liquidity to the market. Guys, wake up; "prop" just means that the capital employed is that of the bank, for the benefit of the bank. That alone does not imply that they use world-destroying dark magic techniques.
I think the important point the OP is missing here, is: Who cares? Who cares if the top people leave Goldman to go start a hedge fund? Who cares if they're pissed that they won't make $100 million bonus in this climate?
Prop trading may or may not have caused the crisis (definitely contributed), but it certainly isn't contributing anything to society. Why WOULD the Dems protect it in its current form, other than the ridiculously powerful banking lobby and the outrageously cheap price a senator can be had for?
None of this is true, so its not worth talking about. It is what it is. You can say that prop traders are paid unfairly, but then again, so are many others, and its unfair to single them out.
clarifications for those who are factually or conceptually confused (many who have posted above me):
1) flamand was in GSPS, not GSAM
2) pure / walled-off prop trading groups such as the one flamand came from was not responsible for loading banks up with MBS / CDOs - these groups are not given enough balance sheet to justify taking entire banks down
3) On prop trading not adding value to society - completely incorrect - prop trading, in the traditional sense deploys capital up and down the capital structure across asset classes, which are used to fund businesses, real estate, etc, which create jobs and homes.
4) Prop traders leave for hedge funds all the time. The relative compensation is much higher at hedge funds.
^^ Agreed with above.
Do people realize that we can't all have long only investors who hold positions for a few years.
this might be a bit academic but in some ways, hedgefunds provide large amountsof liquidity to the market and help aid in "price discoverY"
in some ways, they amplify the effect on the markets as retail investors
Also, technically, unless a broker is just agenting a trade, they will inevtiably be long / short a position and if volker won't allow that then sht, we might as well not have a market at all
Sorry for the noob question, but would appreciate an explanation for below questions.
The above poster talked about "prop risk" and how it ties with the firm's source of capital. Can anyone clarify exactly what is the source of capital for prop trading at BBs? I would imagine prop trading presents a serious Moral Hazard when firms like Citi and BofA, which are large bank holding companies, engage in prop trading. GS and MS, who aren't really into commercial banking, should be fine, no?
I think we're missing the point that their isn't just risk and no risk. There are different magnitudes. In the example farther up a bank might look at two transactions. A 100k loan to a home owner and a 100k prop trade (could be anything but assume its some exotic option). The prop trade has much more risk, much more leverage. Those are what caused issues.
Also I traders have it made. Their performance is not risk adjusted in most cases. The guy who makes the second trade gets paid more despite it not actually being a better investment.
Not necessarily. GSPS mostly does equity L/S and event-driven stuff. The equity L/S probably doesn't use any more leverage than your typical mortgage and event-driven strategies can be way less risky than loans to home owners.
Oh no. How will Goldman ever survive now??
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