rssBanks Already Working Around FinReg Rules
Friday, July 30, 2010 at 5:15 pm
- 10 Comments
Remember that controversial rule in the financial regulatory reform law, designed to prevent banks from making risky bets on their own behalf? It did not take long for banks to figure out how to get around it. At The Atlantic, Daniel Indiviglio explains that banks including Goldman Sachs are just reclassifying “proprietary traders” — ones who trade the company’s own money — as “asset managers.”
One of the more aggressive new requirements, the so-called Volcker Rule, would limit proprietary trading to 3% of Tier 1 capital. But the rule may be easy to sidestep. Goldman Sachs is leading the way around the regulation, by simply reclassifying many of its prop traders as asset managers. One major initial criticism of the Volcker rule was that it’s hard to distinguish prop trading from market making. Goldman is using this blurry line to its advantage.
The problem is that it is virtually impossible for regulators to tell whether a bank is making a trade for a client or on its own behalf. Shouldn’t it be easy to tell, depending on who keeps the profits or eats the losses? Indiviglio explains, not so much:
Prop Trading
A bank senses that XYZ corp is going to collapse. So its prop traders short the stock by selling stock option contracts to investors who want to bet long on XYZ’s continued success.
Asset Management
A bank senses that XYZ corp is going to collapse. So its prop traders asset managers short the stock by selling stock option contracts to investors their clients who want to bet long on XYZ’s continued success.
You may have noticed that, other than the two strikethroughs which merely changed terminology, those two descriptions were identical. The firm accomplishes precisely the same end. The Volcker rule, thus, boils down to semantics. It’s only prop trading if you fail to classify a trade as “client related.” And there it is — the first big loophole in the new financial regulation bill found and exploited. It barely took a week.
The score so far: Big Banks 1, Congress 0
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10 Comments
Pingback posted July 30, 2010 @ 5:43 pm
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[...] Banks Already Working Around FinReg Rules « The Washington Independent [...]
Comment posted July 31, 2010 @ 7:19 am
Only for the brave, here is a question on financial regulations.
Currently the financial regulators in the Basel Committee requires the bank to hold 8 percent when lending to unrated small businesses and entrepreneurs but only 1.6 percent when lending to triple A rated clients.
What would have happened if exactly the opposite capital requirements had been imposed? The banks having to hold instead 8 percent in capital when lending to triple-A rated clients and only 1.6 percent when lending to unrated small businesses and entrepreneurs.
It would most surely have created problems, any regulatory discrimination does, but I hold that a crisis as large as the current one would not have happened… since no gigantic financial crisis has ever resulted from excessive lending to those who are perceived as risky, they have always resulted from excessive lending to those who are perceived as not risky.
We could also have had a lot more of jobs, since almost always the next-generation of decent sustainable jobs is to be found among the current small businesses and entrepreneurs.
Our biggest financial systemic risk is without any doubt our financial regulators
Per Kurowski
http://www.subprimeregulations.blogspot.com/
Pingback posted July 31, 2010 @ 12:02 pm
[...] Banks Already Working Around FinReg Rules “Remember that controversial rule in the financial regulatory reform law, designed to prevent banks from making risky bets on their own behalf? It did not take long for banks to figure out how to get around it. At The Atlantic, Daniel Indiviglio explains that banks including Goldman Sachs are just reclassifying “proprietary traders” — ones who trade the company’s own money — as “asset managers.” [...]
Comment posted August 1, 2010 @ 7:53 am
Regulation is not just a matter of one law, it is a constant cat and mouse game, an ongoing war. It must be fought with constant determination and force until finally irresponsible risk-seeking behavior is stamped out.
Pingback posted August 1, 2010 @ 11:55 pm
[...] Banks Already Working Around FinReg Rules « The Washington Independent [...]
Trackback posted August 4, 2010 @ 3:24 pm
The Western Way of War Has Run its Course – CBS News…
We cover the same subject but your aproach is intersting….
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