Land of a Thousand Spin-Offs
- Joshua M Brown
- February 22nd, 2010
The writing is on the wall for all to see - the major "systemic" banks will ultimately lose their vast prop trading operations. The new question becomes, where will all of those exciting and typically-profitable trading operations wind up?
Five former Treasury Secretaries from both Dem and GOP administrations have come out in support of this part of the Volcker Rule in a WSJ op-ed this morning...
The principle can be simply stated. Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services.
The piece makes the argument that there are no shortage of non-FDIC backed entities who are free to engage in this type of risk-taking - but deposit-funded institutions are too important to be free to run with them.
Now of course, a reasonably intelligent alien from 3 galaxies away would only need 2 or 3 days to look at the bailouts and come to this same conclusion, but this separation is easier discussed than carried out.
The major banks have grown deep roots in trading and proprietary funds/investments. They will argue that the ability to trade on behalf of customers is central to their activities and that prop trading is integral. This argument will not overcome the bitter taste from 2008's Too Big To Fail drama that is still very much in the national mouth.
You rarely get conservatives and liberals on the same side of anything, but when you do as in this case, the force is overwhelming. From the Tea Parties of Ohio to the communist sex dungeons in San Francisco, the people have decided that banks should be punished and should never have been bailed out. Removing prop trading from deposits is therefore a political slam dunk.
The banks will absolutely not be content with winding their trading ops down if and when the Volcker Rule takes hold. Rather, they will seek to "monetize" these businesses - in many cases, they will be spun off. Some will be spun private, others into new public companies. Stakes will be sold and transferred and equitized and partnerized. Restructuring and underwriting fees will mean a bonanza.
In other words, the bankers will win again, they'll just get paid in a different manner.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.