Friday, January 27, 2012


...two things as a matter of fact.

First, the gang is just leaving Davos (there are always a few that stay the weekend or who head to Paris) so as I told you nothing done on Greece today.  The future of 330 million Europeans?  We'll deal with it, not to worry.  The tv interviews all reflect a great deal of optimism that sort of goes like this:

"We will have an agreement shortly."


"Because we have to."

"Why do you have to?"


See, told you there wasn't a thing to worry about.

Now the other thing I told you about some time back and continuously since then, is that Dodd, and the newly engaged Frank, is a disaster.  In confirmation thereof, the WSJ today ran a story concerning the Euro and japanese reaction to the so-callrd "Volker Rule" which bans banks taking deposits from the public from engaging in "proprietary trading" or prop trading as it is known in the trade meaning using one's capital to trade for one's own account.  How to impliment this has been the subject of 9 months of discussions between all of the various agencies involved and now it turns out the Euros don't like it one bit.  Here's why.

Many moons ago,  there lived a giant by the name of Billy Solomon who ran an Investment bank with his brothers and a guy called Hutzler.  In those days these entities were partnerships and Solly& Hutzler was about the best in the business.  Now the business formation known as a partnership derives it's capital from it's general partners who are responsible joint and severally for the entire firm and some limited partners whose responsibility is generally limited to the amount of their investment.  So, when it's YOUR money and you decide that trading is your business you better be damn good at it otherwise...Billy and his partners were damn good at taking risk.

Billy had a belief that  he made public; "You can't sell it if you don't own it," And Solly owned it.  You would love to deal with Solly because if you REALLY had to sell it Solly would buy it; there was ALWAYS a bid in whatever they made markets.  Maybe you didn't like the price, but there was always a bid.  Billy made a lot of money and took a lot of risk and made a lot of markets and had the biggest stones on the Street.  But Billy was making bets with HIS money.  If they got it wrong, nobody but Billy and his partners lost.

There are few partnerships today and Tall Paul, like many of us old guys, regret that.  Now, it's other people's money at risk, and depositors' money as well.  Problem is the trading business hasn't changed that much except for the speed at which it is conducted as a result of technology and the number of instruments traded also as a result of technology.  But at the end of the day, there is a bid and an offered and market makers who make the whole thing work.

To implement Dodd/Frank in the manner intended by those two jerks would require the trading business to essentially return to the modern day Solomon Bros. & Huxler...except there aren't any.  Enter the Euros.

They have lately figured out that take the American market makers out of the picture and the market suddenly becomes very dicey for Euro issues--especially sovereign issues--as while the legislation specifically exempts U.S. Govvies, not so for Euroland.  Ditto the Japanese.  When liquidity vanishes, prices change and yields go up making this bunch hopping mad.  Needless to say, the capital markets no where else in the world have the depth and capacity of those in the U.S.  It is not that this issue has not been raised; it has and was ignored by you-know-who.  And now their response is, "Oops," and leaving some of us to say, "I told you so."

This is only another in a long line of stupidities of this bill that has come up for discussion.  As a general comment, I have said that when one makes markets I haven't the slighest idea how one seperates inventory (as Billy called it) held for prop trading from that which is held to facilitate client business.  Unfortunately, it is even more true today what with the speed of today's marketplace that many times, depending on the product, you have to own it in order to sell it.  You sure as hell can't regulate it because it is a subjective call.  So what has been happening is that the prop desks are being shut down--even by the likes of Goldman Sachs--rather that being forced to go out and hire 50 Jesuits or Talmudic Scholars to explain the damn thing.  The result?  Seen Goldman's earnings lately?  And I thought we wanted the banks profitable and well-capitalized.  Oh, and will customer service suffer?  Probably.  And as for the breath and depth of the greatest capital market in he world?  Hey, it's politics, that's what counts.  We'll leave it to other people to figure out how to make it work.

Speaking of Goldman and Morgan Stanley for that matter, I haven't looked lately but if I wanted to open up a checking or savings account, could I?  What's that you say?  If it's for $10,000,000 it's O.K.?
Well then, why are they considered to be "deposit taking institutions" with access to the Fed's Discount Window?  What's that?  Don't ask those questions?  But...oh, I get it, it's politics.  Silly me.  I think I'll stick to Greece.  That makes sense.

1 comment:

  1. Felix Salmon has a very good piece today on the Greek/Troika/PSI menage-et-trois: