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.
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.” Read more »
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.
Much of the meat of the rule is a bunch of qualitative and quantitative information that banks must collect and hand over to regulators, each piece of which tends to indicate whether a trading desk is more prop-y or flow-y. So if 90% of your trades face customers, that looks like market-making; if 90% of your trades face other dealers, that looks like prop. But there are no bright lines on what is and is not allowed – you just report statistics and hope that the regulators are okay with it.
One important complex of tests involves the distinction between revenues that come from “portfolio profit and loss,” i.e. securities going up or down in value, and “fee” and “spread” income. Fees and spreads are okay. Portfolio is not okay. Or okay only in moderation. Unspecified amounts of moderation.
I continue to have an unhealthy fascination with exactly how the regulators draw those lines. Read more »
Apparently lawyers at Davis Polk pulled an all-nighter reading and summarizing the Volcker Rule draft that was published yesterday. And they’re not the only people annoyed by the regulators’ refusal to get to the point:
As people drilled down into the details of the draft, many were concerned that it appeared to require very granular policing of individual traders at banks as part of the stringent, multilevel compliance regime described in the document.
“They have chosen the most burdensome way of doing it,” said Tim Ryan, chief executive of the Securities Industry and Financial Markets Association, a Wall Street trade association, in an interview.
While last night’s rule-summarizing festivities undoubtedly distracted some young lawyers from the Yankees game / general yearning for death, there may be other more consequential distractions. Read more »
The draft Volcker Rule proposal memo that American Banker got its hands on and published today is a pretty impressive piece of work. As a reminder, people thought that a reason 2008 was so unpleasant was that banks engaged in too much risky proprietary trading. So the testudinal gentleman to the right suggested, and Congress passed, a rule to rein in risk by banning FDIC-insured banks from proprietary trading.
But that’s hard to do, since the basic securities functions of a bank – making markets for customers, and hedging risks in its market-making book or in its regular old deposits-and-loans banking activities – require trading for its own account. So the agencies implementing the rule came up with a rule proposal that sets out, in 200 pages with lots of Q&A in case you have better ideas, to figure out how to distinguish bad “proprietary trading” from good “permitted trading.”
On a first read, er, skim, it’s really smart. It looks at a bunch of different metrics to distinguish market making from prop trading, like: Read more »
The rulemaking process for implementing the Volcker rule, which will ban proprietary trading by banks, seems to be proceeding by periodic leaks to the media about the draft rules – which are always described as having 174 pages but also always discussed one small bit at a time. Today’s leak is from Bloomberg and is about pay:
The rule, which aims to ban most proprietary trading by banks with federally insured deposits, would exempt trades related to market-making as long as the activity met at least seven standards, or principles. One principle would be that traders get paid from fees and the spread of the transactions rather than the appreciation or profit from their positions, according to a copy of the draft reviewed by Bloomberg News.
As a quick aside, I don’t really know what a “spread” is in this context. If you buy $10MM bonds from Client X at 101 and sell $10MM of the same bonds to Client Y at 101.25 a second later, then your spread is pretty clearly a quarter on $10MM bonds. Easy enough. If however you wait 3 days and sell the bonds at 103, is the 2 points “spread” or “price appreciation” or a combination that the payroll department would have to disaggregate?
That quibble aside, though, this is actually quite clever and diabolical. It is difficult to separate “permitted” inventory and hedging activities from “not permitted” proprietary position-taking. But if you just tell traders “all you can do is get paid on volume of transactions times commission that you can charge,” then there’s no incentive to do anything but flow transactions. Making money on hedges, inventory, etc. can’t help the trader and so almost by definition is irrelevant to him.
It is predictably easy to find someone to say “people who aren’t paid giant gobs of money will quit and go to hedge funds and do dark evil things in unregulated corners of the world.” Specifically: Read more »