Jeremy Grantham's latest is a must read, not least of all for this terrific encapsulation of prop trading, which everyone now believes was just a wonderful and innocent little byproduct of a broken system. Grantham calls it for what it truly is:
Everyone in Congress, and anywhere else for that matter, knows prop desk trading (banks trading their own capital like a hedge fund) is a conflict of interest. They may or may not think it important or that it caused this or that problem, but they know it’s a real conflict. Congressmen, since when wasn’t conflict of interest and poor ethical standards reason enough to change the law? But since we bring it up, of course prop trading was indeed the rot at the heart of our financial problems (see last quarter’s Letter). Watching traders take home their $28 million bonus sent a powerful message to lowly salesmen and packagers of asset-backed securities, for example, to get out there and really take some risk. This rot spread to the very top, and pretty soon chairmen of boards were exhorting CEOs to leverage up and look more like some much more profitable rival that resembled a hedge fund rather than an investment bank. Thus encouraged – or intimidated – some CEOs just kept on dancing right off the cliff. Let’s
learn from our near disaster. Viva Volcker!
Hopefully Congressmen will listen more to proven professionals like Grantham over chattering heads covered in half an inch of make up on CNBC. Many more terrific insights on Bernanke, the economy, markets, and so much more, from one of the great minds out there.