Thursday, July 08, 2010

The Volcker Rule & Proprietary Trading

Tuesday's Wall Street Journal featured an article concerning the definition of proprietary trading in a Volcker Rule world.

Personally, I think this is much, much ado about nothing. Hairsplitting, if you will.

Consider this passage,

"But does that mean a trader can't buy a bunch of bonds in anticipation investors would want to buy them a week later at a higher price? What if the trader holds the bonds for a month or two? Such scenarios make it difficult to draw a clear line between proprietary trading and the sort of client-centered trades typically handled by separate desks at most firms."

The answers, in the real world, are: yes, too bad, and, no, they don't.

See, only in the self-referential world of professional trading and investment banking could such an otherwise-clear and unconditional rule or concept be twisted like a pretzel to try to get the result the interpreter desires.

For example, if such pre-positioning were legal under the Volcker Rule, who would own the profits of any such pre-positioning? The client who didn't request it?

Not unless you're Red Bone, your client is Hillary Clinton, and you're trading cattle futures.

It's highly unlikely that institutional clients want their execution desk running speculative books on their behalf. For that, they typically invest in hedge funds. Where they expect such activity.

The Volcker Rule is very clear in its intent. Any institution which takes insured deposits must refrain from speculating with their own capital, because those losses are fungible and, if they result in bankruptcy, the taxpayer must foot the bill for deposits which are essentially lost.

How hard is this to understand? Really?

So, if trading is done on behalf of a client, but not in their custodial account, with their money, that would be------ proprietary trading!

See how easy that is?

The Journal ends with a paragraph containing this passage,

"Goldman President and Chief Operating Officer Gary D. Cohn has said that he expect the firm will be required to get out of "pure prop trading businesses," but he wouldn't rule out ditching the firm's bank-holding company status to gain more trading flexibility."

Amazing. Is this the same Goldman Sachs that came crawling to the Fed in late 2008, begging for a commercial bank charter, so it could borrow at the Fed window and stave off insolvency?

If such a move by Cohn isn't illegal, it's certainly immoral.

This is why Goldman is so hated. And should be, with this attitude.

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