This page has been archived and commenting is disabled.
FT Says Volcker Rule, Given Up For Dead, Is Likely To Pass
When Zero Hedge first wrote about the adverse role of prop trading in capital markets, long before it was a mainstream issue, which in turn incited the response of one Lucas van Praag, in which they assured us and our readers that there were never any issues with Goldman's prop trading desk and that all concerns about prop trading are misplaced. A few months later one of the luminaries of modern finance picked up the Zero Hedge banner and proposed a rule that would end banking prop trading for ever, in essence overriding Mr. van Praag explanation. Yet for the past three months most had left the Volcker Rule for dead, after the banking lobby had once again bought a two year full recourse lease on Obama and his cronies. Until the last two weeks, when first on May 6 we saw what happens how an entire market, gripped in computerized gambling and speculating can break in the span of a few minutes, without doubt facilitated by the banks' prop operations, and also when we saw that the big 4 banks had monopolized prop trading to such an extent (and disingenuously masking it as flow trading: yeah, right, flow trading with a VaR of $150 million... better luck finding greater idiots next time) that none had a losing day, in essence making Madoff's ponzi scheme, with its worse "win" track record a joke in comparison with the ponzi that the market has become. Which is why we read with great satisfaction in the FT that the banking lobby's power is slipping at a critical time: this week the Volcker Rule will be voted on by the Senate, and it may very well pass, despite the "cornered rat" response by the banks. As the FT notes, "the political mood is such that a straight vote on derivatives would be close and the Volcker Rule would be likely to pass." Should the Volcker Rule pass, this will be the beginning of the end for the current casino capitalism system that has gripped Wall Street. And don't be surprised to see a 10% drop in the market as a last ditch self defense mechanism by the primary dealers.
More from the FT, which also discusses the Blanche Lincoln's derivative reform proposal:
The derivatives change, which faces a groundswell of opposition from regulators as well as Mr Volcker, head of a White House economics advisory board, is slated to come up first.
Two bank lobbyists said a powerful combination of Mr Volcker, Mr Obama and the anti-bank fervour in the country meant they had almost given up hope of modifying the Volcker Rule, which would prohibit banks from trading for their own account and investing in hedge funds and private equity firms.
The controversial derivatives provision, likely to be considered on the Senate floor before the Volcker Rule, is a different matter. Here, the industry has the backing of Mr Volcker and Sheila Bair, who chairs the Federal Deposit Insurance Corporation.
Neither provision has been subject to congressional hearings and both are widely opposed by Republicans and some moderate Democrats. But the political mood is such that a straight vote on derivatives would be close and the Volcker Rule would be likely to pass.
The administration is involved in a complex dance with Blanche Lincoln, the Democratic senator from Arkansas, who authored the derivatives provision and is refusing to modify it. Many believe her primary election challenge next week, where she is battling a rival on her left, is the reason why the White House and Treasury will not come out and oppose it.
And who else if not the biggest republican apologist for Wall Street Bob Corker comes out in support of banking status quo:
“I do think we’ll deal with [it],” said Bob Corker, the Republican senator from Tennessee, who blamed the Obama administration for allowing Democrats to offer the provision. “They are aware it is a problem,” he said. “But they want Republicans to fix it.”
The banks' usual bullshit response is that same as it ever was when they want to get something from the idiot politicians: do it our way or the system will blow up. Well, not this time.
The banks’ argument in both cases is similar – the attempt to lessen risk will perversely increase it by preventing deposit-taking banks from mitigating their risk and by driving activities into the less-regulated shadow banking sector of pure investment banks, hedge funds and private equity firms.
And they are hitting where it allegedly hurts most: the household net worth:
Some of the more astute lobbyists have realised that arguments about competitiveness and risk just do not cut it in the current febrile atmosphere. The only way to modify the provisions is to show that they have negative “real world” effects. So, an industry paper by the Securities Industry and Financial Markets Association finds that “if banks cannot use swaps to hedge the risks associated with home mortgage lending, the cost of a $200,000 home mortgage will increase by at least $6,000 to $10,000 and probably more”.
Surprisingly a paper authored by Zero Hedge but riddled with far too many expletives and f-bombs to ever see the light of day, concludes that the impact on mortgages will be negligible, but that banker bonuses will be cut by 50% or more, which is the primary and only reason why SIFMA has been bribed to goalseek whatever results the banking kleptocracy wants published so that Goldman partners can end up owning every apartment in 15 CPW and build a moat around it. This way when D-day comes, the morts will have to first deal with ill-tempered mutated seabass as they go asking politely for explanations why the economy, and the stock market, just like the Madoff ponzy, no longer exist.
»
- 10794 reads
- Printer-friendly version
- Send to friend
- advertisements -
if only....
"And don't be surprised to see a 10% drop in the market as a last ditch self defense mechanism by the primary dealers".
A 10% drop in the market is just one drop in the bucket at this point...Lets make it a 30% drop.
The bastards need to bring back glass steagall, not a watered down version called the volcker rule.
Admit you are wrong and undo the damage. Yah, right. wrong universe.
I guess the banks are going to want some of that lobbying money back.
Tell me about it. They wasted all this time and they already HAVE The fucking answer..
"Gramm-Leach-Bliley act is hereby repealed" .. problem fucking solved!
Hope it doesn't hurt the lobbying business.
Nurse: "Doctor, I don't think a few stitches will help. You have, after all, cut the patient's head off."
Looks like the politicians haven't learned their lesson yet. The May 6th market drop was a warning to the politicians not to mess with the Fed and the banking cartel.
If Congress is really thinking about passing the Volker rule, look out for more market lessons for the politicians. Desperate (banking cartel) men do desperate things and judging by history, banking cartels will sacrifice their first born if that's what it will take to keep the cartel.
Correction. They will sacrifice our first born.
The market is nicely primed for whatever "crisis" they choose to create to further their ends here. Feels like they may want to drop us back into 2008-09 panic mode again before long. Interesting times...
Let me know when Oceana has won ..
Ah, but at this point in the game, such efforts would backfire. I so hope they go for it.
So true, the efforts now will become more clumsy and desperate. Go ahead boys, kick yourselves in the nuts.
Looks like they are between a rock and a hard place. They send a signal to the politicians and then they look like incompetent liquidity providers. Get ready for the gambit, their favorite move. Looks like they might have to sacrifice a bishop instead of a pawn.
I would consider the passage of the Volcker rule, even as weak as it is, a significant step towards breaking the hold of the financial juggernauts. Each such piece of legislation makes the next stage of legislation easier, both because it provides necessary political cover and precedent, and because those that are more likely to oppose such legislation become more vulnerable.
By 2012, it is very likely that something very like Glass-Steagall will be the law of the land, especially if Goldman, Citi, et al continue to make such serious missteps.
I think Mayans were right about 2012, but lack of comprehension has everyone concluding that an 'apocalypse' will occur by way of meteors, whereas it is far more likely to come by way of financial engineering.
"If humanity wishes to save itself from biospheric destruction, it must return to living in natural time."
-Pacal Votan, Mayan Priest King of Palenque, 603-683AD
Totally agree.
It will also probably slow down the obvious stock market ramps on low volume, as end game pretend and extend enters it final stages.
This will allow the deleveraging that needs to occur before the healing can even be remotely possible in the distant future.
Kiss your pensions goodbye America. All we need to do now is get rid of HFT and they will accomplish their goals of destroying this country.
Creative Destruction
Creative Construction.
Serious currency cannonball tonight.
Hey, nice live charts.
Thanks!
Au up 7 bucks too
christ
that's a 5 year low in the EUR
Well, I'm just going to have to say, 'show me'. Enact the legislation, and have it signed into law. Anything less, and I'll continue to believe that nothing has been learned in Washington and New York. Not holding my breath, by the way.
Agree, and I would add, "Enforce it". Given the recent history of the SEC, there isn't much reason to believe that passage and signing of the bill would necessarily accomplish anything.
Even the Volcker rule would be a good first step.
It won't pass or at best it will be defanged ala the Fed 'audit'.
They will keep it going as long as they possibly can. Going back to the old ways would rapidly annihilate the illusion.
They're going to keep this dead god propped up as long as they possibly can... but it ends soon.
Remember Bangkok - try to do whatever you can to forestall sudden outbursts of violence. Let the system implode on itself, and then walk into the wreckage and build anew.
It really doesn't matter, history is repeating itself.
Darwin, Nazi Eugenics and Selective Breeding
http://www.youtube.com/watch?v=8SdWBP52gxs&feature=related
MSM spends many hours spreading wasssist stories.
Insanity: doing the same thing over and over again and expecting different results.
-Albert Einstein
Note: the Einstein rule does not apply to software. How many times have you had the n + 1 software install attempt work?
Nikkei off 2%, all futures off, euro down so much I can't see it from here.
Sleep well?
I know it raises my dopamine levels.
...in other news the euro is down to 1.2266 at last look.
This is a very serious thing. The GBP/JPY [131.09] and EUR/JPY [112.57] are down big [2.3 and 1.3 percent, respectively] at this time.
Wow, pretty strong move below 1.23 tonight, but I bet ECB will step in and rip the faces off the shorts very soon. It's too easy to force a short squeeze at these levels.
1.2263 and falling...
Watch the short term libor rate in relation to the long rate. The banks are raising the short tem rates because of the present risk. Look out.
According to Bloomberg LIBOR is at a nine-month high.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aH4XJoV4TE4w&pos=3
Same thing I saw MM. When the banks get weary of lending to each other, imagine how they feel about lending to anyone else.
eur/jpy now at 112.79 and moving fast
Banks cannot catch a break it seems.
How does one define proprietary trading? The original Volcker Rule draft suggested that it was OK for banks to lend money to small risky companies, and it was OK to take proprietary risk on Treasuries til the cows came home but that it was not OK to buy the equity of those same companies which desperately needed to borrow money.
It also seems as if it is OK to originate a housing loan, and to sell the housing loan, but not to hedge the housing loan. And if there is any business outside the US, it has to be done according to US rules, not local rules.
The Volcker Rule, as drafted, is a shocker, and very few people outside the banking industry have a clue what it really means. There is a simple knee-jerk response that says that if banks are doing something other than taking deposits, they shouldn't be. Funny enough that the great banks of yesteryear were ALL merchant banks and prop traders of some sort.
Seems if that were such a sustainable model they would not be "great banks of yesteryear"
Seems to me the banks get too many breaks. How a bout a simple rule that says that a bank, in order to trade in a derivative, must have an insurable interest in the underlying security. Thus, as you suggest, if they want to credit insure the loan, then they have to have the loan on their books. If they want to insure against a drop in the value of the dollar against the euro, then they have to have a net long dollar position against the euro.
The concept used to work fairly well in life insurance and then we got the execrable "death benefit" securitization business. Would my suggestion solve your problem. Of course it would, but the banks would not be happy; would they? Because the risks that you suggest insuring away is not what the debate is about.
I am not sure that "banks get too many breaks" has to do with either derivatives or prop trading.
I assume that if a customer of a bank had an insurable interest in an underlying security and went to their bank to hedge it, the bank would have to have the opposite insurance interest (i.e. they would have to be naturally short the same security) before the bank could actually hedge it for the customer. Or is the bank allowed to trade against the customer without the insurable interest? The only banks in that position would be the ones who shorted the interest to their customer in the first place, but after Goldman and everyone else did that, that's bad too.
If the price of the asset (loan) on Day 1 is cheaper than the insurance, then that is incentive for immediately buying the asset and insuring it (i.e. packaging housing loans into a structured investment product). If one has to have the thing sitting on one's balance sheet before pushing it out the door in another form, that is called "warehousing the risk", which is what UBS and Merrill were doing in their mortgage structured products business. But that also is now proven to be a "bad thing."
As for having a forex position, I think it is difficult for a global bank with funding, lending, deposit, trading, and investment products business in different places with different growth rates of the component parts and different overall growth of net assets and liabilities (not to speak of margin) across the currency suite they are involved in, to actually "prove" what their forex position is at any given time. Given the profitability and expected growth rate of US operations vs non-US operations, the case could be made that every single major US bank with international operations should actually be significantly short the dollar vs those other currencies.
As for this having worked well in the insurance business, I assume it has nothing to do with the fact that insurance traditionally had its own accounting which amortized and expensed in ways that would not be allowed for banks. I assume we can also say that because Warren Buffett is not actually "prop trading" by selling long-term puts on the indices, or making concentrated bets on illiquid positions. He is "hedging an insured interest" (i.e. owning Coca-Cola is a good way to hedge against Mrs Smith crashing her Geico-insured car because after she crashes it, she will sit at home and drink more coke). And his reinsurance business...
OT - I am waiting to see which bullion site will take the initiative to print a physical price for Gold that is like $1500. One of the sites in Euro-land where there is a scarcity might be just the place.
big 4 banks had monopolized prop trading to such an extent
trading has been rigged for a very long time & has been a major reason for the corruption that has gone on in this country.
it runs much deeper than any four banks.
The Euro at $.90 doesnt seem that long ago. Time marches on. But the, our national budget at $600 billion doesnt either.
Any hints of which day the vote will take place? With options expiry Friday, this could be fun.
May 19, 2008 — This is the Discovery Channel series, Gulf Crisis, in a nutshell. Wolfowitz talks of secret plannings for the NWO and CFR president, Richard Haas, talks about how they kept info from the media
http://www.youtube.com/watch?v=3NuVTuEqxvw&feature=related
Game Theory
http://upload.wikimedia.org/wikipedia/commons/thumb/b/be/Ultimatum_Game_Extensive_Form.svg/200px-Ultimatum_Game_Extensive_Form.svg.png
I am sure this will meet some resistance .... I do believe it's flow trading and here is why - a great deal of bank flow traders try to work at funds and blow out ... when you trade against banks they want to know size and direction ... they rape you coming and going on trades ...
In short, bank traders suck at real trading, and absolutely have to use flow to actually make money. Now ... if you say the mask "insider" trading as flow then that I believe, but to say they make all their money prop trading I don't believe because they require an idiot at a municipality or a bank manager from Utah to rape on pricing to make money and inside info from deal teams from M&A - not prop.
Derivative reform better pass or you can say "bye bye" to every Senator who voted against it.
People Power ! and its about time !
Its starting...the mob outside the homes of bank employees in DC.
http://www.huffingtonpost.com/2010/05/16/class-warfare-hundreds-pr_n_578...
That's just a pre-planned sound bite for the Bamster. A real mob would have torched the bitch.
That's wretched. These commercial bankers are some of the saddest bureaucrats in the world.
It's counter-productive. These movements only fuel the strength of the state. Mob politics never results in a positive outcome.
Look at who bussed in the 'mob'. It was organized by the state. Wake up and smell what you are stepping in.
Does anyone else see the irony in this? SEIU biting the hand that feeds (lobbies) the government that feeds them? or am I off base here?
I love how you refer to bankers buying out "Obama and his cronies" when the only President a rule like this would have any chance of passing under would be Obama. Congress is of course another story. But keep trying to criticize the only hope we'll ever have in favor of bringing in some other real wall street crony who will leave financial reform completely dead in the water. Good luck.
i love the smell of hopium in the morning:
http://www.youtube.com/watch?v=bPXVGQnJm0w
Lt Colonel Kilgore...
Is who George Bush dreamed he was (Read: Psychotic Fantasy)...
During a coke and alcohol passed out REM episode while AWOL from his Texas Air National Guard duty...
"But keep trying to criticize the only hope we'll ever have in favor of bringing in some other real wall street crony..."
wallstreetnobody:
This is an Official ZH Intervention from Obummer Green Shoots Kool Aid Anonymous
Dude, put down the Obummer Green Shoots Kool Aid. You need to get into a 12 step program.
You are only hurting your self and those that love you. We are here to help you. You are powerless over this addiction...
euro broke support from november 08.
http://www.netdania.com/Products/live-streaming-currency-exchange-rates/real-time-forex-charts/FinanceChartPopUp.aspx?symbol=EURUSD|netdania_fxa&name=EUR/USD
http://www.netdania.com/Products/live-streaming-currency-rates-foreign-exchange/real-time-quotes/QuoteList.aspx
Wow. Dropping like a rock. Scary.
The FT story about the 'Volcker Rule' seems to be an orchestrated headline grabber from the Obama administration. Meanwhile, Senator Lincoln's derivatives reform may die this week...quietly. Misdirection, folks!
Haven't we seen this movie before? If the 'Volcker Rule' passes then something is wrong with it! The "Volcker Rule Passes" will be the winning headline for the US taxpayer this week. Remember, last week the US taxpayer won when "Senate Votes 96-0 in Favor of Federal Reserve Audit."
I'm pretty sure that the proposed bill will be thoroughly vetted by TD and the ZH audience before its anticipated passage in the Senate.
Lincoln Primary challenge on Tuesday.
Democrats reportedly want to weaken or strike Lincoln’s provision to force banks to spin off their derivatives desks. Everyone from Sen. Chris Dodd (D-Conn.), who wrote the bill, to Sheila Bair, the head of the Federal Deposit Insurance Co., to the White House, to the banks themselves oppose the measure. Bair and the White House contend that it would actually make derivatives riskier, by allowing banks to move their derivatives tradings operations into subcompanies that might not face strong enough scrutiny. The banks dislike the measure because it promises to undercut their profits. But Lincoln has touted it as demonstrating her populist cred.
The two-term Arkansas senator is facing a challenge from the left on May 18, from Arkansas Lt. Gov. Bill Halter, backed by many of the state’s unions. As of last week, a Mason-Dixon poll showed Lincoln with 44 percent support and Halter with 32 percent. Lincoln needs a majority to avoid an early-June runoff.
Therefore, Democrats will not alter Lincoln’s derivatives language — likely by taking out the derivatives spin-out provision and adding some window-dressing to bolster oversight — until next week. Democrats say the earliest the final vote on the bill will happen is on Wednesday, though that seems optimistic.
Edit: This is an article from last week.
Interesting article here from January 30 giving the historical breakdown of the relationship between Morgan and Goldman and where Volker comes in...
http://www.infiniteunknown.net/2010/01/30/the-illuminati-banksters-jpmor...
what's really intriguing is the suggested 'Mexican standoff' scenario between the two, cited by Max Keiser in this article pre-dating the flash crash of the fat finger... which has been suggested was a shot across Congress' bow to neuter the Fed audit bill...(thank-you Col. Sanders!)... it should be very telling if they fire that weapon again
By that measure, a lack of fat finger algo volatility in response to introduction of the Volker Rule may suggest no conflict between Morgan and Goldman and thus the looting will continue... but just in a more orderly fashion as the public will be fed the charade that this rule somehow re-establishes Glass-Steagall stability (for all but the usual suspects)... arsonist like the heat they just hate getting burned and burning each other
Didn't Volker write the textbook on derivative creation and CDOs when he was with the Group of 30?...ironic
That's a rather confused article.
"Mexican standoff" does describe the situation appropriately. Also, "Illuminati" indicates a level of secrecy for this stuff that doesn't really exist.
Although it would make me feel cooler about myself if I can term myself an "Illuminati defector" or "ex-Illuminati." Maybe I need a goddamned T-shirt.
If the current incarnation of GS is illuminated, then boy are we in for some fucking trouble, because they're pretty moronic.
ordo ex chaos
They're doing pretty well for morons but then again there's no idiot like a useful idiot
Bulltards will bid up futures on Monday, pavlovianlian conditioned to expect the typical Monday bounce. If you don't sell the shit out of that 'rally', then you aren't watching the markets. Look at the Asian markets - this is without a doubt the easiest money EVER.
This is such easy money, I can't believe it. I so hope my previous post is right and the US markets open up. This is like predicting what's going to happen in my kids' Dr Seuss books.
Sunday night Euro-botomy. wow
1.2257 and falling. Nikkei down over 2%.
Someone just woke up the PPT and got them selling DX futures......
Tomorrow is going to be f***ing awesome.
Could be the much awaited ramp down Monday.
Hey Al, it is going to be awesome. Looks like the short position I took last night at 11 did OK, huh?
Gold up $14, I've shorted right here, stop at 1244.2. If it is going to collapse, 11 CST was the time and place. If not, long tomorrow on a pull back.
Oops. Why would you short the only bull market in town? Short the S&P, short Europe, short the Euro, short Asia, short anything but gold. You know, you could just send me the money instead.
Very low risk entry. Stop to BE now because it looks like it's consolidating and looks a little bullish, not the personality I was looking for but still may work out, who knows. Took a similar shot on /DX in Dec, that's worked out pretty well. The best trades are the hardest ones to make. I'm in the trade now for no risk so what happens happen. Hope that answers your question.
Update, damn, look at that sell off at 11. Wonder how that repo 105 called that?
Banning prop trading in firms who take FDIC insured deposits, or who could do so if they actually were a Bank Holding Company, is a good start, but the comment above about flow trading makes a good point as to the vague line between prop and facilitation.
The other major problem---which may well rear its ugly head again today---is the Frankenstein that is algo trading/HFT. Contrary to some views that 6 May was a shot across the bow fired by the banks in response to talk of reform, I think rather that the Day the Bids Died is just the ugly spawn of the computer geeks demonstrating that it has a life of its own. I do not think that the algo operators really gave much thought to what their bastard child might be capable of, nor did many of them give serious thought to the possibility that the last two or three hundred S&P handles had more to do with source code than economic recovery.
I have checked with acquaintances at major sell side desks, and they confirm the market has almost no bid, save for dribs and drabs of 401K money and a slight shift of allocation from Europe to the US. Most everyone else---as fund cash levels indicate---is all in, already. May 6th laid that fact bare after the HFT's pulled their false bids, leaving not even dark matter between "last price" and "no price".
It may already be too late to stop the drop that is one nanosecond away from erasing the last eight months of work. Clearly something should have been done when the illusion of green shoots still held sway and a real buyer might have been in attendance. Guess it'll be a day late and two hundred handles short.
chindit...i think you've got this pegged.
But does anyone believe the Senate actually understands what its doing? Or Team Obama? Or Barney Frank? They do not.
These markets are changing as we are commenting on this article. TBTF, and breaking up the banks is stupid. However, enacting basic legis/reg on derivatives (clearinghouses,) makes sense. So does forcing banks to put up more capital for their aggressive trading.
In addition some simple rules regarding strengthening how securitiztions are conducted should not meet much opposition either. If the banksters have to keep some skin in the game, (lets say 10% of every deal,) they will be far more concerned about the integrity of their offerings. What's the old line about the chef having to eat the food?
Lastly, we need to update bankruptcy law. This is the simplest way to force corporate governance and real risk control. Claw-backs for key managers and directors should do the trick. Just make it 5 years. How hard is this?
Another 1000+ page piece of crap that no one understands and that is loaded with vague language is not the answer. We are creating new DC bureaucracies when the old ones don't work.
Meanwhile there is a real financial war out there and its playing out in currencies right now while the Senate is sleeping.
+100.
A voice of reason in the wilderness. A few issues though:
1) If banks have to keep skin in the game, they have to consolidate the deal under FAS167. This causes balance sheet ballooning (like all the VIEs which have suddenly popped onto banks' balance sheets this year). That does not fly.
2) clearinghouses only work for the plainest of plain vanilla derivs. Anything "interesting" is not going to work. And if you move the derivs trading off to an exchange, banks and customers will lose a link. Banks give customers preferential pricing all the time because other business comes in the door elsewhere. If everything becomes 'anonymous' in clearing, then the bank does not even need to provide the service. The market could actually get less liquid.
3) Totally agreed on capital ratios per risk parameter (the real parameter which is never properly capital-backed is correlation. Not sure how you get that done right because the most conservative way means no netting.
"better luck finding greater idiots next time"
Has Mr. van Praag Been Promoted to Unindicted Co-Conspirator Yet?
Just askin'.
They can pass what they want. Even levy a 100% tax on the TBTF's if they want to.
The jury is in. November will be a bloodbath for incumbents. And they know it.