Bloomberg reports that Obama will announce provisions to limit the proprietary trading activities of banks.
This all sounds well and good, in fact, I’ve advocated prohibiting prop trading (you’d need pretty active monitoring of overnight positions to make sure it has not simply been moved back to order flow desks). It is not a socially productive activity and has no place in firms enjoying government backstops.
But how do you “limit” prop trading in firms that have international operations? Without the famed “harmonisation” with the UK and EU, I’m curious as to how this can be implemented as to not be circumvented (the UK bonus tax fiasco is an embarrassing reminder of blood-minded the industry is about preserving its perquisites).
This is going to be very difficult to implement at this juncture, unless Team Obama has a purely regulatory solution. This should have been implemented months ago, when the banks were on the ropes and beholden to Washington. They are now emboldened and will fight tooth and nail. And the report at the Financial Times says the plan will require new legislation. Given how derivatives reform was gutted and health care reform was botched, what do you think the odds are that something with teeth will be voted in? Pretty close to zero. As the FT tells us, quoting an anonymous source:
“The proposal will include size and complexity limits specifically on proprietary trading and the White House will work closely with [the House of Representatives] and Senate to work this into legislation moving on the Hill.”
Yves here. And what, pray tell, is this about?
Goldman Sachs – which runs a large proprietary trading business and which reports results on Thursday – will be watching the details closely, but the measures are more likely to threaten institutions whose operations are large and span commercial and retail operations as well as trading for their own benefit.
Yves again. Goldman is every bit as backstopped by the government as a depositary. The idea it should get more favorable treatment is absurd.
And you have the AIG and LTCM precedents. Firms outside the regulatory cordon sanitaire were still enmeshed enough with the key international capital market players (now essential to the functioning of the global economy) that entities largely exempt from regulation put the entire financial system at risk. Unless you ALSO limit how backstopped firms are permitted to do business with risk-taking firms, you have not solved the problem, just shifted how and where it will eventually show up.
The most encouraging bit of this story is that Volcker finally seems to be having some influence on policy. But no hint at mechanics yet. From Bloomberg:
President Barack Obama will offer proposals to limit financial institutions’ size and trading activities as a way to reduce risk-taking, an administration official said.
Obama will announce the rules today after meeting with former Federal Reserve Chairman Paul Volcker at the White House. The proposals will be part of an overhaul of regulations and will specifically address firms’ proprietary trading.