Did anyone catch the Volcker hearing in front of the Senate Banking Committee today? I think the senate rocked that hearing asking the questions that most people were waiting to hear.
Bob Corker was the man and made clear the fire walls that are already present that prevent commercial deposits being used for proprietary trading, and mark johannes made clear that this rule would not have prevented the crisis if it was in effect pre-crisis.
IMO, prop trading was not involved in the crisis, so is this policy or politics? and I have a couple of friends in Asset Management for GS/JPM, how does this affect them if banks can't invest in hf/pe?
I think the point is that major banks with commercial arms should not be taking excessive risk because they are so tied into the economy as a whole (via commercial and consumer lending practices). Just because they don't use the deposits for prop trading does not mean that excessive risk is safe / ok.
A small caveat about Volker's proposal is that it won't stop banks from providing financing for PE deals. I heard someone mention that being a PE lender was riskier than actually investing equity. Why is this the case? Shouldn't creditors be the first to get repaid should the portfolio company go belly up?
The whole problem goes back to investing in illiquid assets right? I mean when shit was hitting the fan and no one knew what various derivatives were worth, it was b/c they were illiquid. So prop trading should be limited to liquid assets. The government should mandate that a clearing house be established so there is a liquid market.
Although, I thought that was the original plan??? This administration is like a chicken with its head cut-off. They run for whatever the flavor of the day is in financial regulation.
As far as PE is concerned and if lending is riskier than investing in the fund itself, I would think that it all depends on where the bank falls in line as far as claims on the company's assets are concerned. The bank would have to be senior to all other creditors/investors, assuming the portfolio company goes under and thus making their investment less risky than that of an LP.
Yeah, having a clearinghouse would make a lot of sense, however most of the crisis that affected the banks themselves was the inventory of toxic assets they had on their balance sheet that they couldn't sell, had to take severe write-downs based on the mark-to-market rule when another bank sold some asset at a large discount, and the freeze up of the commercial paper/repo market. All of the major players that were hurt weren't even commercial banks, MS/GS/AIG/LEH/GM.
One senator said it best, "Never let a good crisis go to waste" And they are using this as an opportunity to put through excessive laws just for the sake of regulation
I hope not. I think that some new regulations are necessary because right now the largest banks have a government guarantee in their back pocket. The "living will" and special bankruptcy court idea i've heard a few times I think is a good one. I also agree that a clearning house for CDS products and some other things that are now OTC would help by lowering the risk that the originator goes bankrupt. I just hope that the new laws are passed for the right reasons, and not to just pick on bankers because they are an easy political target.
The mark to market rule has to stay. Taking it away only gives investors less clarity on what a company is holding. Even though fire-sales led to a lot of markdowns on mortgage securities, that was still the going market price and what people would pay you if you stepped out and tried to sell those securities.
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