The end of Wall Street as We Know It

[MKSheppard]

Link

Newsweek Blog; The Gaggle
Posted Thursday, January 21, 2010 12:45 PM
The End of Wall Street as We Know It
Michael Hirsh

After ignoring Big Paul for a year, Obama finally listened. The result is the end of Wall Street as we know it.

Surrounded by economic heavyweights called into the White House, President Obama announced today before the TV cameras that he wasn’t announcing anything new. At least that’s what his top administration officials indicated to the media in a “background” phone call intended to put the best possible spin on things. The administration officials declared that the new—whoops, I mean, additional—proposal today was in the spirit of what they themselves had already put forward last June and what the House and Senate, in consultation with the Obama-ites, had already inserted in their bills.

That’s the official story. It’s utter nonsense. The actual story is that today’s proposal is totally new, far more radical than anything Obama and his top officials, mainly chief economic adviser Larry Summers and Treasury Secretary Tim Geithner, have proposed in the past. Indeed, they’ve been actively avoiding it for the better part of their first year in office. The president was gracious enough today to credit the man responsible for it—“we’re calling it the Volcker rule after the tall guy behind me,” he said—but what Obama didn’t say was that, until now, former Federal Reserve chairman Paul Volcker has been virtually ignored by his administration.

Nearly a year before the president’s announcement, Volcker had proposed barring major commercial banks that enjoy federal-deposit guarantees away from big-time speculative or “proprietary” trading—acting like a hedge fund, in effect, with taxpayer-backed money. When I interviewed Volcker about this last summer, he acknowledged that the president "obviously decided not to accept" his recommendations.

If adopted, along with another proposal to limit the consolidation of the financial sector into giant firms—essentially what’s happened over the past two decades—Obama’s new plan would dramatically change Wall Street as we know it. It would have an effect not unlike that of the Glass-Steagall law of 1933, which forced big banks like J.P. Morgan to spin off their investment-banking sides into new firms (in that case, Morgan Stanley).

Why did Obama decide to pursue this break-up-the-bank plan? According to the senior administration officials, he grew increasingly outraged by Wall Street’s brazenness in going back to business as usual in the year since the crisis. “As we have come out of the crisis and seen major financial institutions make significant profits on their proprietary trading and using the [federal] safety net to do that,” said one official, “it persuaded the president it was worth looking into this.”

What he didn’t say was that Obama’s been losing altitude in the polls fast, and one of his problems is a perceived softness on Wall Street in the face of public outrage. In his remarks, Obama almost seemed to welcome the lobbying onslaught that’s about to hit Washington as the banks seek to quash the effort (the major banks that would be affected by these rules, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, and Citigroup, dropped by as much as 12 percent in trading). “If these folks want a fight, it’s a fight I’m ready to have,” he said.

He’s going to have a fight, a huge one. And as in the case of the derivatives legislation that passed the House late last year, the banks will seek to create loopholes that will allow them to do things as they have in the past. One big one may rest on the technical similarity between “market making” and “proprietary trading.” The latter is seen as simple gambling with the firm’s money. The former will be allowed, the administration officials said. “Yes, firms will be able to make markets, related to doing services for their customers,” said one official. That means that the big banks will have to be permitted to buy and sell securities, Treasury bills, and other instruments in order to create a market in them.

Some experts believe that it’s difficult, if not impossible, however, to distinguish market making from proprietary trading. “I don’t think it’s practical to think you can slice and dice classes of activities in any meaningful way,” Volcker’s onetime protégé, Gerald Corrigan, the former president of the New York Fed and a top Goldman executive official, told me last year. “Say you call me up and say you want to sell $100 million in Japanese sovereign bonds, or $100 million in GE 10-year bonds. You shop it around and go to five or six different [market-making] institutions looking for a bid. If I make the bid, there is at least a moment in time when I own it as principal [in other words, as a proprietary trade]. How are you going to distinguish these things? It’s very very difficult.”

How indeed? It’s not clear the Obama team has thought through any of this and done more than “outline” a proposal, as one put it today.

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I'm cautiously for this -- but you know Obama, he'll fuck this one up by the numbers -- he's kinda like Kennedy that way.

[KrauserKrauser]

While part of me wants to cheer him greatly for this, I'll wait until I can see the final bill that gets passed.

If it's anything like his former claims of SERIOUS BUSINESS NOW BANKS!!!!! the banks will likely end up even better off.

What's funny is if he had made this claim and gotten some traction in Congress before the special election there would have probably been more support for the Dem. candiate, but it's Obama so he has to wait just a bit too long to do just a bit of good.

I also find it hilarious that he wants Wall Street to be super scared about his toughness so instead of actually making a bold move and replacing Geithner and Paulson, two massively fucked up crooks, he just points to Volcker and says "I'm going to do what he said to do a year ago" while keeping Paul and Timmy in power. Idiotic, but par for the course with Obama and economic policy.

[Glocksman]

I agree with ditching Timmeh, but Paulson's already gone.
To be honest, I was hoping I was wrong last year when I smelled a rat over Obama's appointment of Geithner and support of Larry Summers, while kicking Stiglitz and Volcker to the curb.

IMHO after recently voicing public disagreement with the President, Geithner's given Obama the excuse he needs to say 'resign or be fired'.

[Fingolfin_Noldor]

IMHO after recently voicing public disagreement with the President, Geithner's given Obama the excuse he needs to say 'resign or be fired'.

When did that happen? I haven't really been following much of this.

[KrauserKrauser]

I would have thought avoiding taxes and then pulling an Alfred E. Nuemann in confirmation hearings would be more than enough excuse, but that's just ignorant old me...

[J]

I'm cautiously for this -- but you know Obama, he'll fuck this one up by the numbers -- he's kinda like Kennedy that way.

Never fear, the banks have already found a way around it.

Business Insider link

Big Banks Have Already Figured Out The Loophole In Obama’s New Rules
John Carney
Jan. 21, 2010, 3:39 PM


Big banks have already begun poking the holes in Obama’s new rules—holes they expect their banks to pass through basically unchanged.

The president promised this morning to work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

But sources at three banks tell us that they are already finding ways to own, investment in and sponsor hedge funds and private equity funds. Even prop trading seems safe.

A person familiar with the operations of one big Wall Street bank said it expects that new regulation will affect less than 1% of its overall business.

The key phrase is “operations unrelated to serving customers.” The banks plan to claim that much of the business in which it engages is related in one way or another to serving customers. Even proprietary trading, for instance, can become related to customer service if it is done through internal hedge funds in which some outside clients are permitted to invest.

One insider at a bank pointed to JP Morgan Chase’s ownership of the hedge fund Highbridge Capital. It is thought that under a strict “no hedge funds” rule, Highbridge would have to be sold off. But under the rule proposed by the Obama administration, Highbridge can be retained by JP Morgan because outside clients are permitted to invest in it.

A still more devious way is to have a banks own employees be the customers who are invested in the internal hedge funds. That way trading operations can remain closed to outsiders while the regulatory requirement of relating the trading to customer service is met. Goldman Sachs is rumored to be considering this approach. (Goldman isn't commenting on the regs right now.)

“This thing is about showing the public that Obama is standing up to Wall Street. So the rhetoric is heated. But the implementation will require far less change than people think right now,” a person familiar with the thinking at the upper echelons of one of our largest banks said.

“The market is getting this wrong by selling off the megas,” a person at another bank said.

Obama needs to stop screwing around and get serious. Pass a bill to repeal Gramm-Leach-Bliley and put Glass-Steagall back into full effect. No more loopholes, problem solved.

[Stargate Nerd]

If it's anything like his former claims of SERIOUS BUSINESS NOW BANKS!!!!! the banks will likely end up even better off.

Exactly how I feel about it. I just shook my head when I heard this on the news at work yesterday. After a year of broken promises, big business pandering and half-assed measures I won't easily fall for more empty promises.

[Darth Wong]

Interestingly enough, Canadian banks always gave a healthy safety margin to themselves, playing things more conservatively than they were required to by law. American banks, on the other hand, pushed the laws to their absolute limit. Part of the problem is clearly cultural.

Mind you, conservatives might try to spin that into saying that regulation is unnecessary, but the people who want liberalized laws are the same kind of people who would push them to the limit, whereas the kind of people who would stay well back of limits for safety reasons would be perfectly happy with stricter laws.

[J]

Interestingly enough, Canadian banks always gave a healthy safety margin to themselves, playing things more conservatively than they were required to by law.

In the past, but no more. On page 3 of this report from Sprott Asset Management it can be seen that the big 5 Canadian banks have cranked up their leverage to dangerous levels in the last few years. The saving grace is that the assets held by our banks are for the most part a lot more solid and less likely to go kablooie since our banks have managed to offload their low quality mortgages to the CMHC so they won't be rendered insolvent by a housing meltdown, instead, the government, which means we the taxpayers get to eat the losses since the CMHC has an explicit government guarantee. We also haven't gone "all in" on the derivatives and structured finance markets, though our banks do have a worrying amount of mortgage backed securites (see page 13 of the Bank of Canada weekly stats). Fortunately for the banks, most of these have also been unloaded onto the CMHC.

[MKSheppard]

Aw....

Link

President Barack Obama’s demand Thursday that Congress clamp down on the size of banks and their investments got major blowback from New York City Mayor Michael Bloomberg, who said it could cause layoffs and hurt the city.

It’s a clash between the president and the mayor. President Obama wants to whittle away at the size of the financial services industry. … The mayor was so upset about the move — and a suggestion that Wall Street bonuses be put in escrow, which means the money wouldn’t be spent here, wouldn’t help the city economy — he responded with a proposal of his own for members of Congress.

“Maybe we should hold back their salaries for a decade or so and see whether the laws they pass work out,” Bloomberg said.

The mayor also demanded that the members of our congressional delegation go to the mat to protect the financial services industry, much like senators from Texas protect the oil industry.

Link

President Barack Obama’s newest Wall Street crackdown was met with hesitation from Treasury Secretary Timothy Geithner, who voiced concern that politics could sacrifice good economic policy, according to financial industry sources.

Geithner is concerned that the proposed limits on big banks’ trading and size could impact U.S. firms’ global competitiveness, the sources said, speaking anonymously because Geithner has not spoken publicly about his reservations.

He also has concerns that the limits do not necessarily get at the root of the problems and excesses that fueled the recent financial meltdown, the sources said.

Aw; if TurboTax Timmah is against it, then I'm for it.

[Arthur_Tuxedo]

What does it even mean for your country's bank's to be "globally competitive"? People don't seem to understand that the finance industry, beyond its basic functions, is a zero sum game. It's not like other industries where a wildly successful and profitable company can also benefit society by producing a great product. If a bank makes an enormous profit, it means they literally took someone's money and created nothing, either through fees, interest, or being on the right side of a trade (which implies someone was on the wrong side). Of course, you need basic banking and lending for an economy to function, but that speaks nothing whatsoever to the need for giant, nationwide megabanks with armies of advertisers, lawyers and lobbyists, and all of the evidence shows that these institutions do catastrophic harm to their societies and no good whatsoever.

I don't see any financial need that could not be better served by smaller regional banks for basic banking and lending, and separate non-FDIC-backed firms that are not backstopped by any government in any way -explicitly or implicitly- for all the other, riskier shit, including trading, market making, financing LBO's and other megadeals, etc. If other countries let their banks engage in those things and make your country's banks "not globally competitive", so what? That just means they get to have speculative bubbles and subsequent financial meltdowns and you don't. Boo hoo.

[J]

And then Obama turns around and says this

CNBC link

Excerpt:

Obama: Bank Regulators May Have Gotten Too Tough

Published: Friday, 22 Jan 2010 | 3:38 PM ET

By: AP

President Barack Obama said on Friday that regulatory oversight of the country's banks might now be erring too much on the side of caution, potentially hindering the flow of credit to small businesses.

"The banks feel as if regulators are looking over their shoulder, discouraging them from lending," Obama told a town-hall style meeting in Elyira, Ohio during a trip to promote his jobs and health care policies.

Obama said it was not his intention to interfere with bank supervision. But he had told Treasury Secretary Timothy Geithner to make sure that the country has not "seen the pendulum swing too far", with regulators now being too tough after being too slack in the past.

What the hell is this BS? Obama asks for new tougher regulations, then turns around and says the existing regulations are too tough. Gimme a break.

[K. A. Pital]

Too tough?

"Man, your irresponsible shit ruined our economy. I have to get tough with you, so... Here's a shoulder pat. *gentle slap* Hope I didn't hurt you, man... no offense! I didn't mean to be too tough".

It is disgusting to see people, especially so-called "democratic representatives of the people's will" wry like worms in front of these banker morons as if they were some sort of untouchable caste. Ugh. Nauseating.

[Darth Wong]

Why is that a contradiction? They want to crack down on banks growing too large or getting too speculative or obfuscating their finances and assets, not on banks giving short-term credit to businesses. Are we really thinking so simplistically that we try to evaluate everything on a "tough" vs "not tough" scale, regardless of what specific business aspects we're talking about?

[J]

Problem is the banks have questionable lending & speculation in ALL sectors of their business, the problem isn't confined to residential mortgages and mortgage backed securities, it's everywhere. Lending & credit in everything from credit cards to student loans, car loans, business loans, commercial real estate, and so on & so forth have become just as leveraged and lacking in quality as the subprime mortgages which get all the headlines. Standards have to be tightened up everywhere.

To give an example, there are many cases of small businesses taking out massive loans which like borrowers of interest only or neg-am mortgages, they have no chance of paying back. But the banks would hand out these hinky business lines of credit anyway since they could be securitized and packaged into structured finance products and sold for more paper profits, which works for a little while until the cashflow dries up when borrowers default.

Lending & credit in all areas has to come back under control, yes, this means credit will be choked off from where it is now, but that's a good thing since the model we have now is a wide open ponzi scheme which depends on an ever increasing number of decreasing quality borrowers just to stay afloat. Eventually it gets to the point where the low quality borrowers can't pay back their loans and the system implodes, as it's doing now. We need to get back to a system where we have good borrowers taking out reasonable amounts of credit, and that reasonable amount is a lot less than what's floating around right now.

[J]

Good news everybody! Your loyal Senate has been bribed so Wall Street can continue business as usual.
Change we can believe in!

Financial Times link

Volcker rule unlikely to move forward in Senate, lawmakers say
By PK Semler in Washington
Published: February 1 2010 16:10

A proposal by former Federal Reserve Chairman Paul Volcker to limit bank’s proprietary trading will be either be dropped or significantly modified in the Senate, lawmakers and staffers told dealReporter.

Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration’s call to levy a USD 90bn tax on banks. His comments come as House Financial Services Committee Chairman Barney Frank (D-MA) predicted the proposals outlined by President Obama could be law within six months.

Speaking to this news service on Thursday, Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue.

However, Shelby said he expects to hold a meeting with Banking Committee Chairman Chris Dodd (D-CT) regarding the way forward on regulatory reform in two weeks time. A Democratic banking committee staffer confirmed that the meeting between Dodd and Shelby will be critical as Dodd needs to determine the level of bipartisan agreement and the timing of bringing the bill through committee and on the Senate floor.

With the election of Republican Scott Brown to the Senate, the Democrats no longer have the necessary 60 votes to force through a Regulatory Reform package, and any bill will need at least some Republican support to pass. A Dodd staffer said the senator is likely to quietly drop or modify many of the recommendations in the Volcker rule to ensure Republican support for regulatory reform.

“Chris is retiring so he wants to end his career with an important regulatory reform bill and he wants to make the bill bipartisan,” the staffer said. “He is not going to risk bipartisan support to make the White House happy.”

The Democratic staffer said there is an ongoing debate among members of the banking committee about whether the Volcker rule would effectively push risk out of regulated markets and thus ultimately create more risk to the financial system.

Dodd told this news service on Thursday that the banking committee will begin mark-up of the financial regulatory bill in the near future and his committee will hold a committee meeting on the Volcker Amendment on Tuesday with Volcker and a follow-up hearing on Thursday.

Senator Mark Warner, a Democrat on the banking committee from Virginia, also said he has concerns regarding elements of the Volcker rule, many of which are already being dealt with by the committee. He said that one of the problems is in the definition of what constitutes proprietary trading and that regulators should be more proactive in determining what constitutes excessive risk taking by financial players.

Warner also said that the prospective Senate version of the Kanjorski amendment passed by the House also includes using capital adequacy standards to reign in excessive risk taking by financial institutions and that such an approach gives regulators greater flexibility.

A Democrat committee staffer said the Senate committee is loathe to include statutory capital adequacy standards included in the House bill and that such standards should be determing by regulators.

House Financial Services Subcommittee Chairman Paul Kanjorski told this news service he is only 80% to 85% in agreement with the Volcker rule and that many issues raised by Volcker are already included in his amendment passed by the House.

Warner blamed much of the political storm connected to regulatory reform on bankers. He called Goldman Sachs’s proposal to lend USD 500m to small businesses over a five-year period derisory, and said banks need to come out in front of the issue regarding compensation.

Warner said he is proposing that US banks set up a USD 1trn fund to invest in US infrastructure projects as a way to avoid the USD 90bn bank levy. A staffer said that Warner is not calling for the banks to place USD 1trn in cash, but to raise such an amount through leverage.

[Darth Wong]

The Democrats need to stand up and force this confrontation, instead of backing down for fear of the confrontation. If the Republicans end up fighting tooth and nail for bankers, this might finally poke a hole in Main Street's delusional belief that the Republicans are fighting for the common man. They should amp up the rhetoric too. I want to hear the phrase "greedy banker friends" at every turn.

[Steel]

What I love is how the announcement that proprietary trading would be cracked down on was made just the day before the Goldman bonuses were given out.

Conveniently the announcement caused a sudden 10% dip in banks share prices. This means if you work for JPMorgan and got your bonus the day before the announcement, then your bonus, which is given (mainly) in stock would be worth 10% less. For a GS employee 2 days later you would get the same cash value of bonus, which now equates to 10% more stock!

If the dip is temporary or not the GS employee is still better off than otherwise. It really is impossible to think that nobody would have predicted that this announcement would have caused a sudden drop in share prices in big investment banks and that they get a lot of their bonus in stock.

Why did they make the announcement mid bonus season, but just before the GS bonuses I wonder...