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Charlie Gasparino Doesn't Need A Flowchart To Tell Him How The Volcker Rule Works

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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. There are lots of ways that the rule could go, including nowhere, but a reasonable best guess is that it will actually clamp down on banks' risk-taking behavior in a way that not only limits true prop trading but also makes bona fide market making substantially more expensive and difficult for big banks. (So sayeth Jamie Dimon, though he's taking the under on probability of implementation.) Which in turn could provide an opportunity for non-FDIC-insured market makets - in the form of small investment banks, hedge funds, or MF Global thingies - to pick up market share (and personnel). If it's no fun to trade at Goldman or JPMorgan, you'll go to MF and do your sorta-prop, sorta-flow trading there.

So how should we feel about that given MF's operatic falling-out-of-bed act today, following up on its Moody's downgrade yesterday? Not ... not super awesome, probably. Lots of clients now have a near-junk counterparty, which is not great for them. And if the world of the future also involves central clearing of derivatives, then having the average clearinghouse participant be a barely-IG MF is probably not as good as having it be an insured megabank.

But there are some glimmers of hope. I for one was kind of charmed by some of the details in MF's European disclosure, like:

As of September 30, 2011, MF Global maintained a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity), including Belgium, Italy, Spain, Portugal and Ireland. The laddered portfolio has an average weighted maturity of October 2012 and an end date maturity of December 2012, well in advance of the expiration of the European Financial Stability Facility in June 2013.

Unscientific study (okay, no study) doesn't turn up a lot of mentions of "repo-to-maturity" in big banks' discussions of PIIGS exposure. The lesson may be that when your investors and counterparties can't count on the FDIC to give you liquidity, you actually talk about how you're getting liquidity on your terrible, terrible investments. Big bank liquidity is rather notoriously a black box, with runs on derivative counterparties occurring in the shadows in the absence of concrete information. Without the FDIC backstop, MF has incentives to be a little more transparent about its position - which is maybe a good thing if MF and its ilk are the future of trading.


The Volcker Rule Will Come Too Late For Kaufman Bros.

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: