My friend, colleague and periodic business partner B sent me an email the other day including this passage,
"Yesterday, Morgan Stanley was reported to be bulking up its trading staff (adding about 350 people). Its major competition in trading is seen as JP Morgan Chase and Goldman. Today, the Journal headlined, “Property Loss Pounds Morgan Stanley Bank Says Battered $8.8 Billion Real-Estate Fund Stands to Lose Nearly Two-Thirds of Its Value”. "
B's point is that Morgan Stanley could, quite easily and quickly, now that it's a commercial bank, become a major systemic liability and source of risk- again.
When I had lunch with B on Tuesday, he remarked approvingly on the Volcker Rule. Like me, he sees it as a necessary step to segregate federally-, that is, taxpayer-insured banking activities from any financial activities in the areas of underwriting, proprietary trading or investment in non-Treasury assets.
B noted that, having narrowly escaped destruction under John Mack's questionable leadership, Morgan Stanley is far from chastened. Instead, it's hiring literally hundreds of traders and re-entering the proprietary trading arena. Meanwhile, the Wall Street Journal hails Morgan Stanley's leftover troubles with the headline announcing the sizable losses in its real estate investment funds.
Do you, as a taxpayer, really want a gang that lost so much money in real estate investing to be jumping back into proprietary trading in such a major way?
Forget the complex, mistake-riddled omnibus financial regulation bill discredited Senator Chris Dodd is trying to ram through Congress.
What we need, right now, is a simple, clear reenactment of Glass Steagal, as currently articulated by the Volcker Rule.
If this doesn't happen, there's no reason to doubt a repeat of Morgan Stanley's catastrophic, nearly-lethal risky behavior of earlier this decade. After all, it's not their money they are betting- it's yours. You just don't get the upside if they win. Only the downside, when they eventually lose it all.
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