Financial reform bill will destroy big banks
If this financial bill passes in its current form, the bulge bracket banks are basically f*cked. The Volcker rule would prevent banks from engaging in prop trading or investing in hedge funds and PE firms. JP Morgan is already planning to sell Highbridge. And Goldman Sachs will also be decimated.
For the traders at bulge bracket banks, you guys should start considering new careers. The trading desks will be obliterated if this passes.
You're right. There were no investment banks before November 12, 1999.
Bonuses for traders at banks EXPLODED after 1999. If this bill passes, compensation for traders will go down drastically. Of course banks will still exist, but the era of big bonuses is over.
thank god i'm not a trader then eh.
While I do not support the bill I think the key to remember is there was a Wall Street way before people were making big bucks. Whenever I hear people talking about things ending I always think they are overreacting. Lets not forget how much money the big banks gave this current administration.
I agree with Edmundo. Big Banks won't be destroyed, the lifestyle that many traders have grown accustomed to thanks to Banks will be destroyed.
Maybe with no more monolithic giant banks, the Fed will stop this "too big to fail" bullshit.
I agree. In the future we should never have to bailout a company because it's a systemic risk to the economy. Companies need to be able to go bankrupt - it's a good incentive for management, and investors deserve the freedom to choose what companies they invest in, which doesn't happen when the gov't uses taxpayer money to bailout a company.
+1. I couldn't agree more. No one company going down should bring the entire economy down with it. Plus when companies are allowed to fail, it creates more work for bankruptcy lawyers (I plan to be one-conflict of interest disclaimer). It's rumored that the legal tab for Lehman's Ch. 7 is over $1 billion and it's already been paid out.
^^^^ Isn't that the whole problem? The Fed should've stepped in as these banks were becoming so massive. Obviously none of us can speak our minds too much on this subject but it seems that it's too little too late. (That's like waiting until your kid looks like a Walrus to control his diet, instead of stepping in as he was getting so huge).
"There's nothing wrong with being a large mammal." - Jim Morrison
^^^^ Better late than never?
correct me if i am misinformed, just trying to get more informed.
financial reform bill = separating risky activities (prop trading, principal investing, etc etc) from ibank/commercial banking activities. a little simplistic, but thats basically what i am concluding.
this sounds like great financial reform. and maybe the big banks would be worth more in parts.
As far as traders go, I am under the impression that only prop traders will be impacted by this if it passes (and very few of the banks traders are prop traders). I don't see how flow traders would be impacted by this at all pay-wise. (I know that many flow traders hope to eventually work on the prop desk, but even if that is no longer an option they could still go work for the buy-side). Hardly "destroying" bulge brackets in my opinion.
How good are the chances of it passing?
Interesting...
Great point, yunzaizi.
I kind of disagree, but I do see why you would think that way.
Chicken dinner.
How do you presume this will affect i-bankers?
To the point that it's all over for traders.....
HF and Prop shops will still exist, and I would imagine other smaller buy-side firms will be created, purely proprietary trading either public/privately owned.
What this is doing is preventing GS from owning a HF or trading prop while it is advising the general public how it should be making investments.
This WILL effect BBs but it WILL NOT effect trading as an industry...what we'll see is a ton of off shot funds/proprietary firms whose principal and seed is from BBs.
When you think about it, it makes more sense this way. It separates conflict of interest and doesn't actually destroy anything....
You have to understand that Wall Street is smart and has given more money to this administration than any other sector has. This is just a REDISTRIBUTION, not a complete annihilation of trading as a career.
Does anyone else in the industry agree with this? This is how I understand it, and I think it's good.
Big Banks will provide markets and liquidity for HF and small "trading firms" and prop shops that trade to make money. Simultaneously those banks will continue to dominate research, PWM, institutional asset management, and Private Equity/I Banking/Corporate and personal finance/M&A.
It will make the Banks CLIENT orientated and the talent will be redistributed, in fact, I think this will also raise the profile of Prop Shops and put them under the gun, forcing them to be a little bit more accommodating to full time employees across the board, as the prop guys coming from JPM/ML etc will force a more corporate culture on the firms.
Does anyone else agree with me? Also, how will this effect Euro Banks like Barclays/UBS/CS?
I could've not put it any better. As always, there'll always be counter productive bad apples in the complete reform proposal, but in all, this will simply do what m.c. trader just broke down (from my understanding).
All the huss and the fuss, I think is unnecessary and fueling the flame.
I have yet to see anyone with any real legislative power give any sort of meaningful definition of "prop trading". If a market-maker partially hedges a structured product but decides to leave one leg unhedged because of liquidity issues, is that prop trading?
From what I understand, The banks will not be able to not only own hf, pe, and prop desks, they won't be allowed to invest their capital. So a bank would not be allowed to call up Citadel and ask to invest some cash. That would be illegal as well. So am I right in saying that an assload of capital is being taken out of the industry, as none of these banks can be involved with hf and pe now?
I'm a big fan of this because this is great for hedge funds. Now the banks will stop trading against their clients and stop stealing clients ideas. Then we'll be able to make a ton of money!
Why not just have it where banks split risky trading and other services? For example only 50% of money at end of Q4 of the base year can go into trading for Quarters Q1-Q4 of base year two?
Interesting article about 3 things that need to be put into the bill:
http://www.salon.com/news/opinion/feature/2010/04/20/wall_street_reform…
traders will move to overseas?
So traders won't work for BBs as much as they used to? I'm interested in trading after I graduate in a few years. Will there be fewer jobs, or just different places hiring? Will salaries/bonuses go down significantly?
When will they vote on this bill???
So what is UBS going to do with the largest trading floor in the world if this passes...?
The majority of what banks do in terms of sales and trading is called FLOW trading. They provide liquidity in the market, and execute for the clients. They do not (usually) hold positions to make profits.
The bill will limit only proprietary trading--- i.e. taking positions with the firm's capital to make money.
There aren't that many prop traders... but they do make disproportionately large amounts of money. On that point., does anyone know if prop trading profits are used as compensation for the trading team only? I.e. do vanilla IBD corpfin bankers enjoy higher bonuses if prop traders make a killing?
This is incorrect. All flow desks take proprietary positions, whether it be directional bets or leaving legs of a derivative unhedged, it is still risking the firms capital. As far as I am aware, the legislation will pretty much only impact the "Internal Hedge Fund" model aka Proprietary Desk, not preventing firms from taking prop positions... that would be impossible.
^^re: UBS a) the post below is correct and b) correct me if I'm mistaken, but I would imagine european banks are not going to be hit as hard. CS/UBS/BCS/DB are all in fairly good position to benefit from this as business flows out of many american bank
I'm pretty sure if this bill passes, no banks on US soil will be able to engage in prop trading. More importantly, it's likely that European governments may pass similar regulations.
damn, this can't be good.
What things can aspiring future traders do to secure a job (assuming this passes)? Will there be opportunities in the international market for traders?
Flow trading involves taking proprietary positions. You need inventory to provide liquidity. And it's risky, yes. But last time I checked that's exactly why banks are PAID to hold it.
This article http://www.ft.com/cms/s/0/bd48b836-4cce-11df-9977-00144feab49a.html says "As the financial reform effort enters its final stages, there are a number of proposals that could be changed, including a derivatives trading regime and the "Volcker rule", named after former Federal Reserve chairman Paul Volcker, which would ban deposit-taking banks from proprietary trading." So would banks who don't take deposits still be able to do prop trading? How would this bill, as it stands, hurt college students hoping to get into trading? Would it affect all types of trading?
What will this bill do to HFT?
Dont have time to look over the comments but I'm wondering:
Will this be the start of an enourmous rush to start up more prop shops?
Also will this allow day traders to get back into the game?
If you want to be the grease of the economy, you shouldn't have a wheel too.
So it sounds like a lot of traders would be hired by smaller firms and BBs would be less powerful. Would it actually be easier to get into and would the salary stay the same?
What kind of question is this? Honestly, how would anyone know "how easy will be to get in" or "whether the salary would stay the same" when nobody even knows the nature of the change that hasn't even come close to occurring yet?
I'm just looking for speculation. Obviously no one could give a completely accurate prediction since the bill hasn't even been signed into law.
will this affect how banks operate in canada? (i.e. toronto bay st.)
He just didn't word the question right as ofcourse it would be difficult to have exact details as such.
However, anyone with a bit of intuition and knowledge on the industry could probably provide some info on a likely scenario that would play out.
I see lots of focus on prop trading, internal hedge funds, etc. (all important). Also consider sections of the legislation designed to move customized OTC derivatives products onto an exchange - this is a mistake of the highest order. Bad for the end-user, bad for the banks, bad for the economy.
I heard snippets of that on CNBC today. Why is it such a huge mistake? Is it because it opens up derivatives for the common man to trade?
Because liquidity will be drier than a 90 year old woman's... you get the picture.
The point of OTC is that it is entirely customized... ie you come to a bank with certain risks and you get a solution that fits that. Putting all of that customization on exchanges is quite impossible, I don't even know how they'd do it.
Aren't they just moving all OTC derivatives through a clearing house?
Also, it doesn't restrict Banks from running hedge funds and pe shops, they just can't invest their own capital. Is that right? Please correct me.
If the volcker rule is as drastic as the people above indicate, than goldman sachs can basically split itself up like standard oil in 1911
I have not read the EXACT language of the Volcker rule, so you may be right on this. But with the populist rage and political pressure, the socialists in congress and the white house (democrats and Obama) will pass a very anti-business bill. I think one year from now, goldman sachs will be broken into various pieces. GSAM, their internal hedge fund, will become its own entity, and goldman sachs will mainly consist of just banking, research, IM, client services, operations, IT, prime brokerage.
Despite the uproar I can't help but thinking that proprietary trading belongs in prop shops and investment banks should focus on client-oriented work. As far as I'm concerned financial institutions should be able to act as a principal (be it prop trading, PE or HF), perform investment banking services for clients (inc mkt making) or take deposits and make home loans etc, not all three. Regardless of whether it had an impact on the financial crisis they are fundamentally at odds with each other.
hmmm...couple things.
derivatives need to be standardized in some form or the other. as it is right now, its entirely too big of a market not to have some governing rules and principles other than from players directly involved. clearly we have seen what happens when us wall street capitalists are left to our own devices. we push everything to the limit in search of profits = massive amounts of risk. it is the nature of the beast.
this is clearly a very reasonable reformation. we are just witnessing a classic case of power does not concede without a fight. of course wall street will not just roll over and accept the fed/govts proposals as is. and they shouldnt either, but some of this whole destruction/socialism/ rhetoric as a defense is just complete bullsht and politics.
btw, i think the president is proposing some sort of financial cap on institutions. this split of prop/hf trading has only been suggested??...though i can foresee it being a byproduct of these types of proposals.
the real question that has more teeth in my opinion is what the heck does this have to do with reforming the direct mortgage market players at the center of this crisis that nearly bought the house down? what proposals address those issues and stop them from happening again? where are the republicans on this? the white house is getting away with a doozy of a paint brush.
some say all these discussions/proposals are moot considering that wall street is characteristically miles ahead of regulators and will find loop holes to jump through any legislation that gets passed. and i agree. trust me in another decade well have some other sort of regulation/banking institution failure to ponder. this doesn’t mean everyone should just sht on their hands and watch the pot.
one more thing. goldman and the SEC. I laugh at any democrat that doesn’t think this thing reeks of politics given the timing of the announcement and the potential laws we are discussing today. however, don’t feel bad for goldman. it was a well known secret that they ripped many a clients face off on a daily basis knowing well that they were taking the opposite side in size. sure, you can say, all parties are big boys (everyone bank did it – so much for transparency and client interests!), but goldman was the only bank that seemed to do this consistently without impunity. maybe that will slow down now.
This sounds a lot like Liars Poker; and my instructors tell that book is just fiction...
is the volcker rule part of this bill? most of the news stories don't really talk about the volcker rule anymore, so is that basically out the window?
Funny how they conveniently skip over Fannie and Freddie. They get all of the best and brightest economists at work on optimizing derivative regulations so they ignore the more root source of artificial government-enabled demand.
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