Tags: Coming | Shock | Volcker | Rule

Coming 'Shock' From Volcker Rule?

Friday, 13 April 2012 09:51 AM

For Wall Street, the fork in the road is dead ahead: In July, the Volcker Rule will clamp down on proprietary trading, where the big banks can use client money to make trades for themselves in the bond market, padding their bottom line.

The banks argue that such trading makes Wall Street possible by creating billions of dollars of liquidity; Washington wonders if they’re not simply taking risks with other people’s money, specifically, the taxpayers.

“Regardless of how the final rule turns out, it will be a shock to the financial system,” warned a senior JPMorgan Chase executive, cited in Bloomberg Markets magazine. The Securities Industry and Financial Markets Association trade group estimates the cost to corporate bondholders and issuers at $350 billion, the magazine reports, while borrowing costs could rise by $43 billion a year.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

Before the credit crisis, financial giants, including Goldman Sachs and Morgan Stanley, were free to trade as they liked. Once Lehman and Bear Stearns crumbled, even the biggest of those left standing ran to arms of the federal government for protection.

To get access to taxpayer support, the feds had a simple requirement: Become a bank and accept the regulation that goes along with it.

Fast forward to now, and the big banks again face a choice: Either stand on your own two feet, or stay a regulated bank and accept the increasing regulatory oversight that comes with it.

It seems clear that the big banks are choosing to stay in the government safety net for now: According to Bloomberg Markets, Bank of America has shut its bond-trading unit; Citigroup is looking to spin off investment operations; Goldman closed its prop desk; JPMorgan Chase is changing how it manages some prop trading units; and Morgan Stanley is spinning off units in preparation.

Yet the regulation itself is inherently difficult to enforce, points out Peter Wallison, a senior fellow at the American Enterprise Institute, in an Op-Ed in The Wall Street Journal.

“The regulators are grappling with an impossible problem — how to prohibit proprietary bond trading while preserving bank activities that are vital to the health of the capital markets,” Wallison explains, calling the rule “fatally flawed.”

“For example, banks are market makers for all kinds of debt securities, and they stand ready in that capacity to buy or sell bonds and other fixed-income obligations at the market price,” he writes. “If they did not perform this function, individuals, corporations, pension funds and others would not be able to liquidate their assets when they need cash or want to change the composition of their holdings. Yet, in making markets, a bank is clearly trading for its own account.”

Now the Federal Reserve is weighing in, too. Fed Chairman Ben Bernanke, answering questions after a recent speech, sought to assure markets that the Fed would not allow the Volcker rule to diminish liquidity, even if that meant the Fed itself had to get involved, reported Bloomberg News.

“We have heard a number of concerns made” from foreign regulators, Bernanke said, adding that the Fed would “support the market making function and the liquidity in critical financial markets.”

Moreover, the Fed doesn’t expect the banks to meet the July deadline in any case. More than 17,000 comments flooded in during the rule’s comment period.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

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Friday, 13 April 2012 09:51 AM
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