I guess this is a thing? Today is the last day to submit comments on the Volcker Rule so hurry!* No less than Paul Volcker himself was roused from 25 years of slumber to submit his own comment, and while he was up he laid a gleeful smackdown on European governments. You may recall that some clients had some concerns about the Volcker Rule reducing liquidity, with some of those concerns being less sympathetic than others, and foreign sovereigns were among the noisiest complainers. Volcker is having exactly none of it:
There is a certain irony in what I read. In Europe, there are plans to introduce a financial transaction tax, justified in part by officials because it puts “sand in the wheels” of overly liquid, speculation-prone securities markets. … How often have we heard complaints by European governments about speculative trading in their securities, particularly when markets are under pressure?
So, ha, fair. There are other comments ranging from sort of what you’d expect from a guy calling himself Anonymous (“When are you people going to do what is right by your country? You destroy everything thousands of people fought and died for? How dare you counterfeit money for thieves, but NOT for suffering AMERICANS, Oh and for your WARS for PROFIT, prisons for PROFIT when we live in a FREE society??” etc.) to sort of what you’d expect from people calling themselves the Securities Industry and Financial Markets Association, the American Bankers Association, the Financial Services Roundtable and the Clearing House Association (this one is 173 pages long and takes no explicit view on counterfeiting money for thieves though I’m going to guess they’re okay with it). Continue reading »
I understand the goal to make sure these companies don’t take huge bets with their balance sheets. But market making? Just like these stores down the street, when they buy a lot of polka dot dresses, they hope they’re going to sell, they’re making a judgement call. They may be wrong! So protecting the system I agree with, but starting to talk about the “intent”…I tell you… for every trader, we’re going to have to have a lawyer, compliance officer, a doctor to see what their testosterone levels are, and a shrink [asking them], “what’s your intent?”. No we’re going to make markets for our clients to give them the best produtcts, the best services, the best reserach and the best prices. That’s a good thing in spite of what Paul Volcker says. [FBN]
I’ve been pretty skeptical of the whole Volcker Rule thing because I don’t really understand the conceptual division between “making bets with your own money” and “market making,” and I’ve been gratified to see that paid financial industry mouthpieces are on the same page. Now it’s nice to see unpaid mouthpieces agreeing too:
Yet finance ministers from around the world lined up to whisper in the ear of Timothy Geithner, the Treasury secretary, who made the rounds in Davos on Thursday and Friday, about a specific element of the Volcker Rule that has them apoplectic: The rule says that United States banks — and possibly certain foreign banks that do business in America — would be restricted in trading foreign government bonds. Yet the rule, conveniently, provides an exemption for United States government securities. Every other country is out of luck.
The measure, critics say, is likely to increase borrowing costs for foreign governments, reduce liquidity and make the market for foreign government bonds more volatile, the opponents charge. In the end, it may fall into the category of unintended consequences of a proposed new regulation.
So, yeah, totes agreed, but for diversity here is a more measured view:
The Volcker rule is, in many ways, a riddle wrapped in a mystery. It is impossible to know what the impact on market liquidity will be. Foreign banks, or non-banks, may step into the fray to pick up the slack… or perhaps the impact of the rule won’t be that big on US banks, anyway. Without a set of final rules, a period of time to watch them in action, and a parallel universe to see what would have happened if they hadn’t been implemented, it’s all speculation.
Again, I come down on the side of robust market-making by banks being a good thing and so I suspect those lined-up-and-whispering finance ministers are right, but it’s also true that that’s just, like, my opinion, man, and nobody really knows what will happen but if I were Citadel I’d be lobbying like crazy for the Volcker Rule and promising European governments that I’d make awesome tight markets in their bonds. Continue reading »
We’ve talked a bit before about the Volcker Rule and how it’s going to have creepy unintended consequences because it is really hard to distinguish “market making,” which is what bank-broker-dealers are supposed to do, from “proprietary trading,” which is evil and destroyed the world. Today we have an excuse to talk about it again because (1) Uncle Vikram sort of shrugged off a question or two on it on this morning’s Citi earnings call, though he’s not quite in the Jamie Dimon camp of “I can’t hear you there will never be a Volcker Rule shut up shut up SHUT UP”; and more relevantly (2) Stanford finance professor Darrell Duffie just put out a study saying that the Volcker Rule is going to have creepy unintended consequences because it is really hard to distinguish “market making,” which is what bank-broker-dealers are supposed to do, from “proprietary trading.” Don’t be distracted from the rightness of this study (obvs!) by the fact that securities industry trade organization SIFMA paid Duffie to write it.* Instead, let’s focus on the important questions, like: where is my $50k check from SIFMA?
Much of this paper is a full-throated, conventional defense of Grossman-Miller market-making, which is nice and will bring a tear to your eye if you’re a market maker: Continue reading »
JPMorgan earnings this morning were a bit disappointing, with investment banking revenue down 30% y/o/y in what may be a bad sign for the rest of the industry, but the Jamie & Doug In The Morning Show remains finance’s top-rated program in its time slot and it did not disappoint today. This is in part because the callers have learned how to play to the hosts’ strengths; my favorite part of the call went something like this (paraphrasing slightly):
Jamie Dimon: Ooh I hates me some regulators. Next question?
Analyst: Wow. After Jamie’s speech about regulators, my question is going to sound really mundane. [Asks mundane question]
Braunstein: [Gives mundane answer]
Analyst: So, Jamie, do you want to say anything more about regulators?
Dimon: Sure! [Does]
But Dimon’s statement that “basically there’s no one in charge of the global financial system” was more or less unprovoked. It was also the main theme of his remarks, particularly about Europe, where “regulatory policy is completely contradictory to government objectives” as the ECB throws gobs of money at banks to encourage them to lend and keep their governments afloat, at the same time that regulators tighten capital standards, reducing lending, and crack down on holdings of dicey peripheral government bonds. For himself, he’s a big fan of the ECB’s work on liquidity, less keen on Basel et al.’s work on capital requirements. There is no book-talking whatsoever here.*
Continue reading »
Here is a standard set of moves in talking about bank riskiness:
1. Banks take too many bad risks!
2. Regulators should only let them take good risks!
3. All better now!
There is, like, a problem there, because actually bankers tend to have compensation structures that are more directly tied to their success, and also larger, than those of bank regulators – which means that, if you had to guess who would be better at picking the good risks, you might pick the bankers over the regulators. You can try to address that problem, maybe by improving the incentives of the regulators to make them better at picking the good risks, or by improving the incentives of the bankers to make them better at picking the good risks, because after all your goal is actually not optimal regulation but optimal risk-picking.
There are other approaches available. Here is a cop-out option:
Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed.
Continue reading »
Boy, those new Fed regulations, they are long. They have lots of things. Like stress tests, and liquidity buffers, and the thing where you can’t have credit exposure of more than 10% of your regulatory capital to one bank.* But the thing that they mostly have are capital requirements, which are kind of not that surprising, i.e. they seem to be Basel-esque including G-SIFI surcharges, which is terrible if you’re Jamie Dimon, but also wonderful if you’re Jamie Dimon.**
I’ve never really understood bank capital regulation, like, deep in my bones. You can risk-weight it. You not risk-weight it. You can do other things. I don’t know.
One thing you can’t do, though everyone does, including me sometimes, is say that banks have to “hold capital.” Clive Crook in Bloomberg today says a number of interesting things but most importantly he’s today’s person pointing out (emphasis added)
a popular fallacy: the idea that equity sits idle and unused on a bank’s balance sheet as a kind of overhead. In fact, equity is just another source of funds. The proceeds from a sale of equity can be lent out or applied to other purposes just as readily as proceeds from, say, taking a deposit.
That’s, like, important! The first part, the overhead thing, whatever. The second part, that “equity” and “capital” are words you say about funding, not assets, is a thing that you should know. If you don’t know it, go find it out. Crook goes on to say: Continue reading »
