Financial Reform is Doomed, Blame the Treasury

Tuesday, February 02, 2010 , , , , 2 Comments


Obama last week proposed a law that would bar banks from betting in financial markets with their own money, known as proprietary trading. Called the "Volcker rule," after Obama advisor Paul Volcker, the law aims to prevent banks from taking risks that drag them to the brink of failure.

No sooner did Obama propose the idea than analysts and bank officials criticized the attempt to limit proprietary trading, in part because of the gray area between banks taking risk and helping customers.

Major banks with dealer subsidiaries are in the business of buying and selling securities and derivatives with clients all day. Sometimes, a bank buys an asset because a client wants to sell, and sometimes a bank buys because it likes the asset and wants to bet on its appreciating.

The White House said it does not want to interfere with banks trading for their clients, but the motivations for a trade are not always clear to an outsider.

True. And how can the White House judge risk? It's trying to fund unlimited muni bonds! That goes to show you how risk-adverse they are. (!)

Many traders are skeptical of the government's ability to rein them in.

"How will a regulator know why I'm making a trade?" said one trader at a major firm.

One former corporate strategist at a U.S. bank said his department often was not sure why the bank's own traders had exposure to an instrument or asset -- whether it was for customers or to bet with the bank's own money in a proprietary trade.

Steve Kohlhagen, a former university professor who built multiple derivatives businesses on Wall Street including at First Union, a bank now part of Wells Fargo & Co, argued that regulators lack the know-how to outsmart traders on abstruse financial products.

"Regulators can try to reduce certain kinds of risk, but it'll just pop up somewhere else. It's a constant chasing game that the government will lose," Kohlhagen said.

If that weren't enough, the Treasury Department has a "How to Cheat New Bank Rules" primer:

Some institutions will be able to avoid facing the Volcker rule by shedding their insured deposits, according to U.S. Deputy Treasury Secretary Neal Wolin on Monday.

Goldman Sachs Group, which funds fewer than 5 percent of its assets with deposits, could easily change its funding profile to get out from under the rule.

Was the Volcker Rule doomed anyway? Economic Populist thinks so.

I guess we can hold out for the real "Hope".

Meanwhile, Volcker's plan does nothing to address the "non-bank" issue (especially when the Treasury points out how to cheat) and seeing as how Bank of America, Citigroup, et al are still crippled and limping along, it might be time to look at the real problem.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


beebsblog said...

Why doesn't the government split banking from investment products from home loans and let the chips settle where they may.

For the life of me I can't figure out why the Federal Reserve is buying up all this bad paper in exchange for Treasuries.


You are thinking too logically about it. Of course it does not make sense to a normal person. But imagine you are trying to execute the greatest wealth transfer in the history of the United States - how would you accomplish that?

Like magic! Yay!