This is the type of politic mistake that I was talking about that will kill the economy:
http://online.wsj.com/article/SB10001424052748703…
The White House wants commercial banks that take deposits from customers to be barred from investing on behalf of the bank itself—what's known as proprietary trading—and said the administration will seek new limits on the size and concentration of financial institutions......"You can choose to engage in proprietary trading, or you can own a bank, but you can't do both," the official said.
Now we get this on top of the $90bn bank tax implemented by Obama last week.
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Bye-bye GS, and MS bank holding company status;
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JPM, BAC, and C have very sizeable proprietary trading activities. Although their "prop desks" may be small, nearly every single trader on the floor takes "prop" positions even though he is technically a "flow" trader.
These prop positions make a lot of money for these banks as well, and if they lose this income then it will definitely have a negative effect on lending...
Administration officials said they also want to toughen an existing cap on bank market share. Since 1994, no bank can have more than 10% of the nation's insured deposits. The Obama administration wants that cap to include non-insured deposits and other assets. The White House released no information on what those other assets might be, saying officials would work closely with Congress to set tougher caps designed to prevent the further concentration of financial industry markets within a few behemoths.The White House hopes the two new proposals will be taken up by the Senate Banking Committee as it moves forward with major legislation overhauling and toughening bank regulations in the wake of the financial crisis. Administration officials said they were not trying to resurrect Depression-era laws that strictly divided commercial banks from investment operations. Nor would their proposals force existing financial firms to downsize.
The new size limitations aren't going to force any banks to downsize, really? How is that possible if Bank of America is already at or above the 10% limit. How is it possible that after adding new categories of assets to count towards the limit BAC will not be significantly above that limit and forced to downsize?
If this goes through, we are all screwed. Democrats will get their way with this one, because a republican vote against cracking down on wall-street will not look good during the elections.
Thank you again for killing the economy just so your party can get a couple more votes during this year's elections.
This sucks!
It won't pass so easily.
I wouldn't be surprised if this passes. The senators just want to keep their seats. They will drag this out and pass a bill through at a critical moment right before the elections; republicans would commit political suicide if they all voted against such a bill.
Obama is like a big baby: He gets what he wants or he starts crying. And if he still doesn't get what he wanted then he cries louder.
No fan of Obama, but at first blush these don't sound outrageous to me.
I think some of it is sensible, but you missed the second half of the proposals, basically not allowing banks to take any part in PE (whether that means they can't place clients into PE or do asset mgt services for PE/HF has yet to be flushed out), which may be non-sensical.
Furthermore, taking all prop out of the system will reduce liquidity across many different asset classes, which at the end of the day will increase the cost of capital/financing for a lot of different parties...there will def be a big law of unintended consequences emerging from this legislation
Most of these banks shouldn't be engaging in these activities anyways because......THEY SHOULDN'T EXIST
Yeah, that is the way to go. The moral hazard is out there big time! We need to take steps against it urgently!
By the way, it like the phrasing of the American people having held hostage by banks which are to big too fail. Although its politic rhetoric it definitely makes the point that banks needed to be saved with taxpayers money without any other option. And please do not argue that TARP has been paid back by most banks. Obviously, the overall economic damage was much greater than the TARP money only. (and write-down session has not ended yet)
These regulations are absolutely outrageous. Capping on ownership of undisclosed classes of assets? Sounds analogous to communist land/industry reform.
Will agency traders even stay on board big broker-dealers if they aren't allowed to engage in prop trading at all? If this were an effort to curb front running I could understand it, but there is scant a mention to it at all. If the purpose is to prevent i-banks from taking advantage of cheap financing via FDIC insurance, then throw up a wall between S&T and commercial banking with no funds flowing between either. God what a sore loser.
So it seems like GS and MS will just give up bank holding status and keep their prop trading. However, their cost of capital is going to be significantly higher without having access to FDIC insured funds. This seems to be minor though in comparison to the situation Citi, JPM, BoA are facing. I dont think any of those banks would have picked up an i-banking component if they knew such legislation would be passed years later. They wont have any choice but to completely stop propietary trading and lose substantial amounts of profit. Anybody know which of the 3 depends on prop trading more? Does JPM?
Also, which banks have the largest market share of non-insured deposits and other assets and what approx percent do you think they stand at? What I am really trying to understand is what level the Obama administration will set the cap at and whether it will force any of the banks to downsize. Thoughts?
As much as I agree that this poses a material risk to any economic recovery (and what has Obama proposed that hasn't), the more important news story of the day was the Supreme Court ruling on the ability of businesses to fund their own political speach. Given the threat posed by this latest round of Obama/Volcker-nomics, we can undoubtedly prepare for political lobbying by the money center banks to the extent that we've never seen before; which in this case is not a bad thing.
However, coming from an outsider to Wall Street, does anyone think that additional regulations are not necessary or forthcoming? I don't think maintaining the status quo is possible or desireable, but there is a whole spectrum of possibilities between the status quo and a complete up-ending of the financial system. Unfortunately, if the SEC hadn't lost any hint of competence, this is probably a job best left to them, as financial professionals, and not suits for hire in DC.
New regs don't sound that bad. Tidbits from the Barney Frank interview on CNBC
If you have access to the discount window, you will not be allowed to engage in Proprietary non-client facing trading. Meaning that JPMorgan AND Goldman and anybody else who has a hedge/alternative fund within their Asset Management division is fine (I presume that you will be allowed to co-invest along with your AM clients).
These rules only apply to banks that have access to the discount window. If you want to do significant non-client facing proprietary trading, then you should form a non-Bank holding company akin to the Citadel Group (which now houses Citadel AM, Citadel Securities, and their custodian division Omnium). In addition Goldman Sachs can REVERT to being an investment bank instead of a Bank holding company. This makes since because it is NOT FAIR that Goldman has asks to essentially unlimited near-FREE capital to trade.
If you want to remain as a Bank Holding company with access to the discount window, then over the course of 3-5 years you would have to divest, spin-off, or otherwise dislocate your Prop trading business.
Some of these rules, in a different variation, were with us until 1996-1998, and I recall that we had a pretty sound financial services sector in the economy.
If a bank has 360,000 fucking employees, then it is too damn big to manage. This is not wal-mart, the financial markets are extremely complex and 1 bad trader can break a bank so trying to manage retail banking, prop trading, corporate finance, commercial mortgage loans, transaction services, etc. is a hard job. I don't like heavy handed regulation, but I DO NOT like bailing out fuckers like Citi. When banks get so fucking big that they threaten every one else, then shit needs to be done.
If you originate a loan then you can only securitize 90-95% of the loan meaning that people won't just sign up homeless people for $300,000 loans and securitize them to the dumb fucks that buy this shit and then resell. Makes sense, becuase now you would have exposure to the underlying loan and it will encourage you to maintain strict underwriting standards.
Dumb shit/ still needed/ other
What about Freddie and Fannie?
What about a clearing house for derivatives (particularly whose underlying security is a mortgage)
why in the world that any given financial institution has 3-6 regulators, who they can sometimes choose for themselves?
None of this shit has passed. This is just Obama tooting his horn. None of us know what the final bill would look like. The real shit may be far better or far worse then we think for the industry. It's really Frank and the other senators who have to step up and create common sense, realistic, and market sensitive solutions that don't kill the US banking industry but that doesn't allow a repeat of 2007-2008.
You Brits are fucked harder, because no matter how much bull shit comes out of the Senate, it pales in comparison to your House of Commons or whatever that is brewing even more stupid shit beyond the 50% excise tax. My buddy in London is practically ready to fly to NY today, given the amount of dumb shit being passed in Britain.
just a little nitpicky, but important comment: GS and MS are now financial holding companies rather than bank holding companies. this would hardly affect them.
liked this piece by evan newmark in the journal:
http://blogs.wsj.com/deals/2010/01/21/mean-street-obama-is-killing-amer…
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Anyone interested should read EInhorn's old 2006 speech http://manualofideas.com/files/blog/einhornspeech200611.pdf
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A reporter actually asked me a couple months ago what I would do if I were tasked with rehabilitating Goldman's public image. I gave her a list of things I would do in the order I would do them and the very first thing on the list was for Goldman to voluntarily rescind their bank holding company status.
I told her that I'd make a big deal about it, that I'd hold a press conference to explain that an investment bank being granted bank holding company status was an unfair advantage because of the access to Fed funds, and that we (Goldman) as a bank didn't think it was right to speculate with taxpayer dollars.
Not only would this strategy put pressure on Goldman's competition to do the same, and therefore benefit Goldman disproportionately no matter what their competition did, but it would also remove any incentive the government had to meddle further in Wall Street's affairs.
Now it looks like the government is going to do it for them, and all the other investment banks. This is not a bad thing, people. Are some people on the Street going to lose their jobs if this passes? Absolutely. But not the best people. When a bank has 100,000+ employees, there is a LOT of dead weight.
The constant deregulation and crony capitalism of the past 15 or so years has made Wall Street lazy. Changes like these will lean out the banks and force them to innovate. That is a good thing.
Seems to be a direct attack on Goldman. Internal HFs and PE don't make up a significant amount of the other banks' profits due to either their large retail and consumer side contributing to the bottom line as well (e.g. JPM, Citi, BOAML), or their scaling down, or lack of internal buyside funds in the first place. I have not seen any evidence which suggests prop trading was a significant contributor to the crisis, or why banning it eliminates any form of systematic risks. Seems like a butt hurt reaction to the Massachusetts vote.
Add to this the CFTC's recent energy trading size limits proposal, Obama's super tax and the bonus tax in London, and all I see is a populist bash on banks' trading revenues.
Not to mention that with all the fury on bankers' pay at the moment, most of 09 bonuses were paid in deferred stock, which was priced in the days preceeding Obama's announcement. Since then, bank stocks have taken a massive hit, meaning not only did people get paid less, and less in cash and more in stock, but the value of that stock component would've fallen substantially as well.
so UBS, CS, and DB will only be affected if Switzerland and Germany, respectively speaking, enact something similar? i am confused as to how this bill passing might affect these banks, since they are based outside of america, but do have private equity/hedge fund groups based in the US. any thoughts would be much appreciated.
I have strong libertarian leanings, but still, this doesn't seem too crazy to me. As long as the government will consider some institutions to be "too big to fail", it seems like a good idea to minimize both the risk of a massive implosion and the amount of tax dollars that will potentially be on the line.
I think a commitment to refuse future bail outs would be ideal, but I don't see that happening. This might be a second-best alternative. At the very least, there are far worse ideas out there and far worse things that regulators could be doing.
bump on zip's questions... will the US government just not let foreign banks with commercial banking arms set up props trading and alternative investments divisions in the US? wouldn't this just fuck the US over since foreign banks will still be able to do what they want in their homelands?
I don't think this will pass and if it does pass it will be highly watered down. With the dems losing their super majority I think Obama is just trying to get some support for a lost party.
Obama might not kill the economy, but he sure as hell is killing the market. Just read a poll that says 71% of investors think Obama is bad for business. Not a good thing at all.
i dont understand the backlash. i am not a trader, but this sounds like prudent financial regulatory reform.
you don't understand the backlash? really?
well if youre a prop trader or an aspiring prop trader, then i would understand the backlash.
Not outrageous : will def not affect GS and MS as much as JPM boAML and Citi
How did the abolition of Glass Steagall Act in 99 increase financial innovation??
I don't think that most of you understand the severity of these proposed regulations. Obama wants to ban banks from proprietary trading that is “unrelated to serving customers”. Therefore if you are a flow trader, you would not be allowed to take any prop positions on your book, which would make trading the most boring job in the world. If this law were to pass, then nobody will want to work in trading anymore and all of the traders will leave; pure flow trading is fucking boring as hell. Obama isn't only about removing prop desks from banks, but he wants to ban taking prop positions by other traders as well.
Anyway, Obama needs to focus on getting jobs and not on bashing Wall Street and pushing his stupid health care bill. Reform Wall Street later after the economy gets back on track! This guy is a moron that is too worried about his public image and getting electoral votes for his party's upcoming election that he is stepping way off track and will cause a double dip recession.
Since this announcement the Dow has tanked 450 points in just two trading days, and the government has lost over $1bn on its equity stake in Citi.
The government needs to focus its efforts on creating jobs, expanding green technology, and needs to stop this populist bullshit. We are going to go down the gutter very quickly if this shit continues. Obama must be the most incompetent president we ever had, he is going to irreversibly mess up the US economy big time.
Focus on unemployment first, PLEASE!!! I heard a great proposal several months ago that would give companies tax breaks if they increased their workforce, but nothing has come to fruition, because these guys (congress) are focusing on banker's bonuses instead of creating jobs.
We are going to need a lot of luck to get out of this mess.
You should tell this directly to Obama. Probably he will change his politics because he is extremely concerned with keeping the job of trading as exciting as possible. What is the issue with flow trading? Trading on customers behalf is the first task of a trading desk in general, Everything concerned with prop trading is ultimately increasing risk and potential benefits for the bank's employees. This would be ok as long as the bank's are also able to accept and pay for the downside risk which they were not. And even though prop trading may not be the main cause for the crisis; banks held a lot of prop positions in the riskiest tranches of asset backed securities as insitutional clients were generally more interested in the safer tranches. This was the main reason why ultimately the banks were liable and needed to write-down on these assets. So certainly a more regulated framework here would have taken some damage from the banks.
stk123, you've got to relax, dude. This is a good thing. Yes, it will mean pain on Wall Street. But making proprietary trading "the most boring job in the world" isn't a bad thing. Banks should concentrate on banking, traders should concentrate on trading. It's that simple.
I understand wanting to fight changes to the current system, because the current system makes it unbelievably easy to reward bankers and fuck over shareholders. But trust me: the cream will rise to the top. The bankers that have been sucking up bonus for the past five years who should have been selling vacuum cleaners door-to-door will get their righteous comeuppance. And that's assuming the proposed legislation even passes.
Smart bankers will embrace these changes.
Whether this is a good thing or a bad thing is remained to be seen, but my biggest problem is the timing with this thing. First Obama slaps a $90bn tax on the banks, which mind you wasn't supposed to happen until after FIVE YEARS since TARP was first implemented. But Obama decided to push it forward to one year, because he can, and it is a populist thing to do. Now he goes after banks even harder.
My biggest problem is that we are not out of the financial crisis yet and the governments around the world keep acting like we are. They keep throwing punitive taxes at the banks until it will finally bite them back in the ass.
We are not out of the woods yet; wait until unemployment goes down to 7%, and make sure that the economy is really back on track before reforming Wall Street. It needs to be done, but if you start doing it too soon then we are going right back to another financial crisis 2.0 - and it will happen soon.
The only thing Obama and his administration are concerned with is their image and their party. He doesn't care about the middle class or the middle-right, at all (the ones that have most of the wealth in America). Sooner or later people that voted along Democrat lines are going to wise up and tell the government to cut the shit. The Democrats keeping power in November won't happen and all of this garbage will go away. He thinks his rhetoric is going to keep him in power because it's considered "populist" but in reality he's really bending over the people that would be creating jobs through their small businesses or putting up 97% of the tax dollars the government collects. People won't idly sit by and let this happen. Look at Massachusetts for Christ's sake. Ted Kennedy's seat is now held by a no name Republican. If that isn't a referendum on Obama and his rhetoric, I don't know what is.
Obama needs to stop meddling in Wall Street's business. The taxes he's proposed against the largest banks are downright illegal. Why should the large banks, who paid TARP back, be liable for the fact that the government won't collect from the smaller banks and the auto industry? It's like saying "Hey JPM, we're going to need you to pay some extra taxes because Regions Financial and GM are total fuck-ups." Downright ridiculous Socialist behavior if you ask me.
The government should be happy about big bonuses in reality because big bonuses equal big tax dollars.
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