If you’re a more or less regular consumer of efficient markets hypothesis Kool-Aid then a fun activity is to handicap the probability of various public policy things based on market reaction.* So for instance Obama’s budget is going to reduce the tax deductibility of munis! And the muni market didn’t care! So, no, Obama is not going to reduce the tax deductibility of munis. You heard it here first, or last, or whatever. (Exercise for the reader: is Obama going to raise the tax rate on dividends?)
Since today seems to be Volcker Day hangover it’s worth pondering this: Read more »
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). Read more »
If you’re in a certain line of work, and I bet you are, then your main concern about things like the Volcker Rule and increased capital requirements for banks is that they might reduce your comp. If you’re in that line of work, you’re also probably the sort of person who has a higher than average aversion to having your comp reduced. However, you’re also the sort of person whose comp everyone else would be happy to see reduced, because you make too much already you greedy jackass.
That poses a quandary because nobody’s all that interested in hearing your arguments against the new rules, even if they’re good arguments and not 100% about your own personal remuneration. One thing you could do is get proxies to make your arguments. If you think that the Volcker Rule will reduce liquidity in foreign government bonds, you could suggest to foreign governments that it’s really important that they lobby against the rule on your behalf. You did that. Good work. Let’s see how it turns out. If it turns out well, the next step would be to get other clients to say “well, we want liquidity in our [stocks/bonds/rate swaps/whatevers] too,” since that would then be a more compelling argument.
I think that’s what’s going on in this sort of amazing FT article, but something has gone terribly wrong: Read more »
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. Read more »
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: Read more »
Sheila Bair, former head of the FDIC and cartoon-klutz-villain of Too Big to Fail, comes in for the occasional gentle ribbing on Wall Street, and her column in Fortune today is well set up for another round of gentle ribbing, which I will get to in just a minute, so you might think that that headline was intended to make fun of her, but actually, no, she makes a solid point:
MF Global took proprietary positions in European sovereign debt through what Wall Street calls “repo to maturity” transactions. It technically sold the European bonds to other firms, agreeing to repurchase them at a premium when they matured in 2012. MF hoped to make money by pocketing the difference in the rate it paid its trading partners and the higher rate paid on the bonds themselves. … Under the 300-page Rube Goldberg contraption of a regulation recently proposed by federal agencies to implement the Volcker Rule, “repo” transactions like MF Global’s are not generally treated as verboten proprietary trades. Thus, even if MF Global had been a bank, it arguably could have used this exception to gamble away, putting the FDIC at risk.
Now, if I had to guess, I’d say the better side of the argument is that the MF sovereign trades would in fact be streng verboten under the Volcker Rule. (Except, of course, as she points out, that MF is not an FDIC insured bank and so is not covered by the Volcker Rule.) I read the rule’s coverage of “any long, short, synthetic or other position” in a security to include the Corzine repo-to-maturity, which is at least a “synthetic position” in the underlying debt, and since the position seems to have been more “prop” than “flow” it would probably be prohibited. But I had to search around in the proposal for some time to come to that conclusion – it’s not apparent even from the mammoth Davis Polk flowchart that has replaced the actual rule text for my day-to-day Volcker Rule pondering efforts. And the meaning of “synthetic” may not be the same to everyone. So I’ll spot her the claim that a bank could “arguably” use a repo-to-maturity structure to prop trade to its little heart’s content. [Update: A lawyer I trust points to the Volcker Rule's "repo exception" for trades arising out of repo agreements; he thinks that Bair is right that the MF Global trades would fall under the exception and not be covered by the rule. I suspect that the intent of the "repo exception" is to cover the people providing the repo funding (here MF's counterparties), not the people with economic exposure to the position, so I'll tentatively stick to my original claim, but in any case the murk is even murkier than I'd thought. By the way, if I'm wrong, then things are even worse than Sheila Bair thinks. Basically any prop trade is fine as long as you fund it via repo.] Read more »
Disappointed by MF Global’s dismal results today, its outsize European exposure, and its CEO’s politics, the Fox Business correspondent tweeted:
Maybe! Other possibilities include:
1. The Volcker Rule doesn’t go into effect until 2012, and
2. When it does go into effect, it will apply only to FDIC insured banks, not creepy quasi-bank things like MF Global.
But the Volcker Rule does matter for creepy quasi-banks. Read more »
You could probably think a few things about GS’s earnings released this morning. If you’re an employee, you might gulp nervously at that $292k comp accrual so far and the 1,300 folks whose mastery of the universe became less masterful this quarter. If you’re a shareholder, you have to be modestly pleased with mostly adequate revenues in most businesses though kind of pissed about ICBC. If you’re an accounting purist, you thrill to the idea of a bank that managed not to book billions in DVA gains.
Here, though, is a thing not to think: “Goldman Sachs lost money by doing all of the things the Volcker Rule says it shouldn’t be doing.”
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On today’s enjoyable-as-always earnings call, Jamie Dimon was not ashamed to confess that the Volcker Rule has not yet made its way to his pile of bedside reading material. Understandable! Also, he thinks it’s anti-American. Unsurprising!
Dimon may not be sweating the Volcker details because he thinks that everyone will eventually wake up and figure out the whole anti-American thing and the Volcker Rule will never actually be implemented as proposed. And he’ll do what he can to make that happen. In response to a question from Jason Goldberg at BarCap asking him to quantify the effects of the Volcker Rule on JPMorgan, he said that it’s early going on the rule and “let’s let it work through the process.” That process could include some Dimon-directed lobbying, as he told the analysts on the call that they’d better get their shit together to send in anti-Volcker-Rule comments by the January deadline: “I hope you understand how important this is not just for your own business but for the United States.”
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You could, if you wanted to, divide the world into people who find parsing through the Volcker Rule draft creepily fascinating, and people who would rather not, thanks for offering. The first category, as far as I can tell, consists of (1) me, in small doses, and (2) a PowerPoint-enabled band of lawyers at Davis Polk, who helpfully put together an insane flowchart of the Volcker Rule. The latter category is everyone else.
So if you were, say, David Viniar, and you clicked on Davis Polk’s flowchart and noticed that it had nineteen slides many of which look like this:
… you might say “fuck it, there has to be an easier way.” Fortunately, there is, and it’s right there on Step 1: if you’re not an insured depositary institution (or bank holding company or affiliate), you’re not subject to the rules and you can go merrily on your prop trading way.
True? Somebody thinks so:
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