Limit Banks’ Proprietary Trading? Links Worth Noting on Possible Reprise of Glass Steagall Maybe
by Linda Beale
Limit Banks’ Proprietary Trading? Links Worth Noting on Possible Reprise of Glass Steagall Maybe
Obama takes on America’s banks with new Glass-Steagall act, Guardian.co.uk, Jan. 21, 2010
President Obama came out in support of the “Volcker rule” intended to stop depositary banks from running hedge funds and using their money to bet on the markets. I particularly like the part that recognizes that allowing banks to merge into bigger and bigger consolidated enterprises is not likely to be in the public interest. (I’ve actually proposed we severely restrict tax-free reorganizations generally.) About time that Obama stood for something stronger than “oh, let’s limit leverage a little bit” on the big banks. It will take a significant package with significant changes to make a difference to the amount of risk in the financial system, but looks like Congress has already decided it doesn’t want to touch the Volker rule with a ten-foot pole. Or at least, the people in Congress that need to move something through.
US Senator Dodd: Strongly Supports ‘Volcker Rule’, Boles, dow jones (Feb. 3, 2010)
Then there’s Chris Dodd, about whom there have been on-again, off again indications of his support, nonsupport for the Volcker rule. Dodd now says he’s supportive, but worries about his compromise negotiations on banking reform. I’m worried about those too–that they will be far from the bold steps that need to be taken to get this issue under control. Breaking up big banks–not just protecting deposit banks–is probably a step that needs to be taken.
Towards a 21st Century Glass-Steagall, new deal 2.0 (Jan 21 2010) (new site for me, discovered courtesy of my Angry Bear colleagues) (interesting take on problems of proprietary trading)
“What we don’t want is internal hedge funds to be leveraging up and gambling using money that comes with a safety net for preventing devastating bank runs that is provided by taxpayers….putting up ‘walls’ to silo off these idfferent functions within one company won’t help us–we actually need to spin these functions out.”
Yves Smith, naked capitalism, Goldman, Morgan Stanley Can Escape Volcker Rule (Feb. 2, 2010)
Yves isn’t very supportive of the Volcker Rule, because it fails to acknowledge that it is the systemic risk in the capital markets, more than worries about bank runs, that led the Fed to support Goldman, AIG and other Big Banks, forcing mergers of Bear Sterns and Merrill, letting Lehman fail and nearly causing a collapse. The credit default swaps and repo markets were the center of the problem. And while I tend to think there are nonetheless quite a few good reasons to reinstate some boundaries for banking and size-control mechanisms in addition to the puny leverage control mechanisms that were under discussion, she’s absolutely correct that it’s that federal guarantee, now extended to support investment bankings’ casino gambling in the capital markets, that is the knot we have to unwind if there is any hope to avoid future taxpayer bailouts of investment bank profits.
It would be enough to “regulate” banks if they had to adhere to the same accounting standards that were to guarantee “a true and fair view” as in any onther industry. Then they couldn’t leverage without collateral or e.g. not maturity mismatch. Ah … and yes, they’d be about as profitable or struggling as any other decent business.