I'm sure you've all heard of the Dodd-Frank Reform Act and more importantly, the Volcker Rule that's a part of it. So, I'd like to get some thoughts from people who believe the Volcker rule will go some ways in preventing another financial crisis by limiting the amount of risk banks can take and those who believe either that the Volcker rule is too watered down or prop trading wasn't to blame in the first place.
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pros vs. cons benefits - stronger risk mgmt culture v. important imo - reducing conflicts b/w buyside and sellside activities - helping to delever/derisk the system
cons - taking liquidity out of the market (private or public markets) will be a great detriment - taking revenue opportunities away from banks (will charge fees elsewhere - e.g. monetizing currently free consumer banking products)
Prop trading is not a sole driver and was not a direct catalyst to what happened. However it is a good step to shift higher risk activities out of a bank holding co structure as the system, given how levered governments are, how levered consumers are, how levered past LBOs are, etc cannot take another crisis like the one we had
Honestly, all they need to do to prevent a global financial meltdown is reinstate Glass-Steagall. There are other things to work on as well, but there's a reason why Glass-Steagall was put in place after the Great Depression, and putting it back in place would do a whole lot of good.
While that's the trend - separation of depository operations from IB is somewhat irrelevant right? The current corporate structure of a global universal bank, whereby commercial lending/corp banking is seamlessly presented as a solution in conjunction with DCM and ECM products greatly benefits segments of the economy where capital is less efficiently allocated and where growth is still a possibility (e.g. SMEs).
Instead, the role of IB has to be redefined. If a sellside IB is to be an advisor or agent or whatever you want to call it, then focus efforts on being that. Principal activities are those of an asset manager. If an IB chooses to become a capital provider then risk management has to be a stronger focus.
The problem is in less liquid products where market making desks have to bid on illiquid inventory to facilitate sellside activites like market making -- how do you delineate b/w prop and mkt making then?
What? I'm not really sure what you are trying to say here.
Let's make an analogy to gov't, just to put in perspective what a FOOLISH decision it was to upend this rule:
It's like the information wall between the CIA and the FBI. If one ever goes rogue, the other can help take it down. This was created after Watergate, when politicians were using the FBI as a political weapon [it's not] and CIA guys were imported to collaborate. After 911 they pushed to combine their resources, not realizing that one was a backup system to prevent catastrophe in the even to the other failing.
People need to learn their history. The story of America this last decade and a half is to just repeat history and make the same mistakes. It's gotten so fucking annoying that after this comment, I probably won't have any shred of respect left for the general public, so they can fucking go redeem themselves.
I'm here to get fucking paid.
I agree with you that reinstating Glass-Steagall would help firms manage risk but I don't know if it's "all" that's needed to do. I realize you said that there are other things to work on, as well, but I don't think the Glass-Steagall played as big of role in the crisis as the media portrays it. How does reinstating the act prevent securitizing bad loans? How would this stop the clogging of the commercial paper markets, which fund the day-to-day operations of many companies? How would this prevent hedge funds from withdrawing their prime brokerage accounts in times of panic?
Repealing the Glass Steagall affected JPM, Citi, and BAML the most. Citi's actions has convinced me that using deposits to invest in risky assets is dangerous but on the ohter hand, JPM steered through the crisis fine, so I think it's more important to have regulations that enforce proper asset allocation and debt levels.
If the Glass Steagall was there, then Merrill would have collapsed and caused another "Lehman Shock" (in other words, another global shock). If anything the repeal of Glass Steagall allowed BofA to save Merrill and thus prevented another round of an economic ass rape.
If my reasoning is wrong, feel free to point it out. I think this is an interesting topic.
Historical analysis has shown that the negative behaviour that was purported to be the basis for enacting Glass-Steagall was in fact either a) over-reported or b) overemphasized by Congress to pass financial regulation during a period when the public had a large appetite for such a reform. The Gramm-Leach-Bliley act was introduced as a result of this, as well as to allow US firms to become more competitive in lieu of the financial giants being created across the Atlantic.
In addition, the major Canadian banking players have never been forced to deal with regulation like Glass-Steagall and have never experienced systemic failure like their American counterparts. It is my irrevocable opinion that reinstatement of Glass-Steagall would be a move backwards for bankers and consumers. Wall Street and the public alike need to move past pointing fingers over the financial crisis and get on with their lives.
Agreed.
@TheKing - you will like these:
http://www.nytimes.com/roomfordebate/2010/12/07/should-megabanks-be-bro…
http://www.alternet.org/economy/143942/don't_you_think_it's_time_to_rei…
Since 4Q08, banks have gotten bigger and the financial system is even more risky. If the situation doesn't concern you, there is something wrong with you.
+1 TheKing. This being said, Goldman probably poses a systemic risk in case of failure, regardless of it not being involved in commercial/retail banking. Securities firms should probably be forced (hate saying that) to go private as well to enforce a sense of personal liability. Salomon going public really opened up Pandora's box in terms of excessive risk taking.
GS was actually given a commercial banking license by the govt. during the crisis so its deposits could be insured by the govt. and that was done, in my opinion, because GS is too big to fail.
While I understand the sentiment behind bringing back Glass-Steagall, considering that that is unlikely to happen, do you guys think the Volcker rule is a step in the right direction?
As I mentioned above, GS and even MS were given commercial banking licenses during the crisis to insure their deposits. And today, most of these financial institutions are so large and so interconnected that it's hard to see the govt. letting any of them go down. Knowing that they are more or less backed by the govt., is there incentive for traders at these banks to not take unnecessary risk?
I think part of giving GS and MS commercial banking status was to give them access to the discount window and make them "too big too fail" in more official terms. But GS is such an integral part of today's market infrastructure that their failure would rock the financial system, whether they are a depository institution or not.
I can follow the logic of the Volcker rule, but I don't think it's really the answer. Banning prop trading is certainly politically palatable for most people and it does cut off an avenue where excessive risks have been taken by banks. However, prop desks weren't the ones peddling CDOs at the height of the crisis and while the credit traders who held on to them made a mistake, anybody on Main Street who held them got hurt too. Personal liability like the one you had a private firms up until the late 80s is what banks really need. Clawbacks and compensation in the form of equity are probably the closest you can get to that while keeping banks public.
^ good point paradox, they will bet the house, it's not their money, it's a cheap call option. If you blow up the next sellside firm thinks you're a star for having those kind of risk limits anyways. Repercussions are hardly witnessed.
"It's not their money"/"backed by the gov" --Even if you award equity as comp to trading desks (so that it is "their money") you have like 500 diff product desks, IB, PWM, lending and who knows wt else driving the FI's stock price.
If you divide and simplify these entities it can help w aligning compensation to shareholder value creation. Imagine a separate entity. With prop trading/principal activities separate for example you can award equity that is driven by a risk/return culture vs. an IB client - driven culture.
Volcker Rule sounds nice and theory, but in practice it won't work because of the gray area between prop trading and market making. Take for instance Goldman's Special Situations Group, which invests the firms own money in debt and equity of troubled companies (which sounds like prop trading), but also makes loans to high risk borrowers (traditional lending).
http://www.bloomberg.com/news/2011-03-28/goldman-special-situation-prof…
Where do you draw the line? Where ever they decide, the banks will always find loop holes that allow them to take bigger risks and generate higher returns.
This was already said.
I'm all for Glass-Steagall in theory, but how effective was it really? From what I remembered before Gramm-Leach-Bliley, a bank like Bank of America had a separate subsidiary called Banc of America Securities that was its broker-dealer. The regulation made things difficult, but there still were loopholes and ways around the regulation. There most likely were conflicts of interest between the investment bank and the depository bank, but they weren't caught along with all the other banks that operated similarly.
As jmayhem said, Main Street and the gov need to move past pointing fingers at Wall Street. Main Street just needs to be smarter about their own consumer decisions, like reading fine print before using credit cards or signing crazy mortgages. And the government (WH, Fed, FDIC, SEC, FTC, etc) needs to stop falling asleep or letting things slide that could eventually lead to a crisis (i.e. credit rating agencies, ponzi schemes), rather than blame Wall Street and create "new wide sweeping regulations" when in fact it was just a matter of a lack of enforcement than ineffectiveness of current regulations in place. Wall Street will be Wall Street. Things turn into a game of numbers or greed. And as public companies operate, everything is to maximize shareholder value. Sometimes, the integrity/morality of an action is lost in the grand scheme of things or businessmen abuse their power. The government should be there to do their job correctly to detect incidents, whether accidental or deliberate. Until that all happens properly, Wall Street isn't exactly the only scape goat.
The entire point of separating ibanks and commercial banks is to make it so that ibanks can take as much risk as they like in any form they like and that if they fail, they won't drag the economy into hell.
If ibanks are independent, they can do whatever the fuck they want, period, end of story. And if an ibank fails, it fails, that's that. Capitalism at work without the need for bailouts.
I'm writing this on an iPad, btw, so I'll likely chime in with more later. But, Let's be clear, if you make commercial banks do commercial banking activities and ibanks do ibanking activities and get rid of the supermarket structure of the tbtf banks, it prevents commercial banks from getting into the kinds of trouble that they did from 2002 - 2008. It removes the entire premise of too big to fail and gets banks back to doing what they are supposed to be doing.
I cannot even believe bigge2win's comment about "how effective was glass steagall really?"Are you serious? Getting rid of glass steagall, passing the commodity futures modernization act, and keeping interest rates next to zero for years are the mother fucking primordial ooze of the crisis. Shit straight up would not have happened without the disastrous deregulation that took place in 99/00. Yet, now, we have clowns like you asking if regulation is really necessary. And the sad part is, there are so many people who hold this misguided point of view, that shill for the banks like fucking fan boys for their favorite sports team, that i doubt things will ever be fixed.
I fail to see how this is at all debatable.
TBTF banks should man up and admit that they are part of the government, are subsidized by tax money, and DON'T EARN what they get paid. All this wordplay and parsing out of ideoligical bullshit obscures the fact that if something is vital to the nation and gets government protection, it's no longer a free market entity. If they are a gov't organ, then so be it: get in line for the gov't paygrade.
period.
You really didn't understand my hypothetical question. I said I agreed with Glass-Steagall, but I raised a counterpoint just for discussion to show how it might've been ineffective. Then you group the Commodities Futures Modernization Act and low interest rates with Glass-Steagall, which were all completely separate things. Plus, all the junk mortgages were thrown into CDOs, MBS, CMOs, and any other security long before Glass-Steagall was repealed. They were created at least 15-20 years before, so you can't credit the repeal as the very beginning of these securities. But we're just talking about Glass-Steagall. And I also said "effective regulation" as opposed to blaming the lack of regulation.
Why don't you carefully read posts before going on your high-horse and insult ppl like a tool. It's pretentious fools like you who give bankers and Wall Street a bad name. This is a forum for discussion. If you don't agree, then educate everyone. Otherwise you're the real clown.
I assume you haven't seen my posts on this topic before.
I'm honestly getting tired of rehashing the arguments because it doesn't go anywhere. Not even going to address the idea that people like me give Wall Street a bad name, because I'm one of the few people I can think of who works in the business who believes that there isn't nearly enough accountability or regulation.
As for your hypothetical, it was basically you saying "from what I recall, banks could already potentially get around Glass-Steagall with loop holes," there is nothing to address here because there is nothing concrete to address.
The fact is that Glass-Steagall was overturned with the Gramm-Leach-Bliley Act of 1999 which legalized the formation of Citigroup (which was then headed up by Bob Rubin, one of the key architects of the bill) and then the commodity futures modernization act of 2000 was passed (tahnks to dickheads like Larry Summers, Greenspan, and friends) led to the deregulation of OTC derivatives. These two combined with cheap fucking money courtesy of Greenspan turned Wall Street into a casino and helped crater the global economy and led to the bailouts. Yes, people took out loans they should not have, but the spread of the risk throughout the system and the insane demand for new mortgages was created from the top down.
Reinstating the Glass Steagal must be done.
But may not be enough. Banks aren't systemic risk ONLY because of their commercial function.
what would prevent GS and ms from giving up their bank charters.
what would prevent GS and ms from giving up their bank charters.
Btw, I didn't toss the shit. I only toss shit when someone's being a total asshole or trolling.
Yes, the CRA originated in 1977, but as I said, Clinton signed an expansion of it in 1999. The CRA loans were pretty regulated and monitored well. That we agree on. They didn't account for that much of the subprime mortgages, but this regulation and the GSEs indirectly set up the environment for bad mortgages. Competition went up in the mortgage industry, leading to mortgage houses and thrift banks offering better rates/conditions with eased credit standards. That trend would push even the industry leaders to take some kind of action to keep up to maintain revenues/customers. Otherwise, how would ppl with bad/unqualified credit ratings/scores even be allowed to buy a home. There's nothing else that could logically explain how subprime mortgages dominated the industry. The industry went sour after the CRA expansion, much like how banking went sour after the Glass-Steagall repeal.
To me, it's a matter of what enables the economy to fail/suceed and what "inputs" produce the "outputs." Had there been no bad mortgages, then there wouldn't be anything bankers/Wall Street could package together into those CDOs or bets that hedge funds could make with CDSs against the housing industry. I see it as root cause analysis. Whatever those conservative pundits say is obviously pure garbage that no one can take seriously though.
For the fucking life of me I just can't help to respond to this absolute bullshit.
CRA and Clinton had nothing to do with the expansion of sub-prime credit; sub-prime credit become the "hot" thing to do because banks needed to generate higher yields from their loans since Greenspan (in all his infinite and god-like wisdom) decided to stimulate the economy with 1% federal funds rate after dot-com bubble. Why would the banks do something so stupid? Because they can sell bad loans off their books and profit from it (thank Greenspan/Rubin/Summers for that). At that point, who gives a shit who you lend to as long as you can sell the risk while keeping the reward. None of this has anything to do with Clinton or CRA of '77.
And sub-prime was only the first domino to fall. If you don't get this, you'll never comprehend the magnitude of risk that was in and is currently present in finanical markets.
Likewise, Wallstreet shouldnt be the only one to be blamed. They're guilty in being unethical, greedy and fradualant. But what's new, that's Wallstreet's game. Regulators and Wallstreet clients need to figure that out on their own and until they see fit to unfuck themsleves, they will forever take it up the ass from banskters at their own detriment. No, check that, at the TAXPAYERS detriment.
The CRA is the LAST cause of the economic crisis. Fannie and Freddie were dragged into the sub-prime credit debacle because private label lenders were chasing yields, which in turn forced the GSEs to buy increasingly poor loans to stay competitive.
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