Thursday, February 23, 2012


Well, the comments are in and it is no surprise that the vast majority of them range from how awful the thing is on its face and should be scrapped, to minute ways to fix it depending on who paid for the comments.  What? What am I talking about?  Oh, the Volker Rule of course, the final language for which is to be drafted into law in the coming weeks.  Not surprisingly, the blogists and script writers have picked up as well most decrying the millions that have been spent by the industry in an attempt to demolish this abberation of legislation.  One of the more interesting articles that has appeared was in the NY Times the other day by Jesse Eisinger, writing for Pro Publica which describes itself as, "an independent nonprofit newsroom."  Esiinger is a pretty good writer.

His storybegins with, "...the Volker Rule is as good as dead."  Now, depending of course on one's point of view the response could be "GOOD" or "WOE TO THE WORLD!"  Your scribe would simply add, "what the hell did you expect?'  Eisinger points out that with the public outrage which produced this legislation still pretty much in place, it was impossible for the "banks" (to use an all-encompassing word) to kill it outright but what they have managed to do is to bloat the language into, in his words, "a hopeless monstrosity."  Gee, I thought I said that months ago?  Why don't I get paid for that kind of insight?

Mr. Eisinger's solution to all of this is to simply ban prop trading the result being that the risky activities would cease because the lawyers wouldn't be able to rationalize any of the law's language.  Interesting.  Failing that, he would introduce "bright line rules" to clear things up.  More interesting.  Finally, he gets to the real point of his article.  "There is a surfeit of liquidity on Wall Street" he writes.   "It generates fees...but is of very little social worth.  It disappears when it is most neaded."  This is in answer to the argument that the Rule would reduce liquidity on the street.  He continues in another paragraph: "Regulators, could if they wanted to, ban all market making at deposit taking institutions," and quotes Steglitz and Johnson in stating that the regulators could provide a absolutely simple rule.

All of the above is absolutely correct but unfortunately, comes to us as a result of a number of errors in analysis beginning, unfortunately, with the revered--in my mind at least- -Paul Volker.  Looking back at the debacle, it struck me that Mr. Volker was actually musing that is the banks hadn't been freed by Glass Steagall none of this would have occurred...he was against the act being overturned in the first place.  I don't think he had ever reached a firm position but in the heat of the moment but the "reformers" seized upon his comments and the Congressional ass-covering operation began culminating in Dodd/Frank in which was imbedded "The Volker Rule."

Who was buying, selling, making markets or doing anything else on the street had nothing to do with what happened.  Had Loeb Rhodes been around it still would have occurred. When one has a complete mispricing of risk, lack of institutional controls, insufficient regulatory oversight, lack of buy-side dicipline, ignorance of the products on the part of management, and an atmosphere of over-the-top greed and hubris, there is a very good possibility a problem might develop.  Prop trading was about as small a factor as there could possibly be in such a scenario.  And yet, this has somehow morphed into the single most terrifying thing we must face and defeat.

Tall Paul, it has been said, is out of touch with today's market place.  Sadly, that is somewhat true because his musing were in fact of a different time.  One of the great difference between investment banking and commercial banking as it was then known was not in the business lines but in the corporate structures.  Commercial banks were public institutions, investment banks were partnerships.  There was a very real logic in allowing partnerships to perform the more "risky" parts of the business of finance because the reality of using one's own capital in a business is still the greatest risk management tool that has ever been invented.  The threat we face today is the vast size of institutions and the interconnection of these beamoths in an international marketplace where transactional speed is meausred in nanoseconds, not in the business they do.  The repeal of Glass Steagall was essentially meaningless; the switch from partnership status to corporate status was far more meaningful.  In 2008, Goldman Sachs was a large as any "commercial" bank in the world.  They took nary a deposit and oh, by the by, when people say "deposit taking institutions," they really mean retail banks and the deposits are from Mom and Pop.  Last time I looked those deposits were guaranteed by the full faith and credit of the United, well, ok...but that's better than nothing.

Nevertheless, in his article Mr Eisinger did hit on something that is REALLY important which we shall try to explore tomorrow or the next day.  Big snow alert coming  My till could turn into a shovel.


Carter my son, you are a true piece of work and a true cynic.  Ireland?  Not for a while.  I think we'll play with Portugal first, it's easier and everybody likes the Irish.  Of course if He With The Hottest First Lady In Town gets wacked in the elections, who knows.  The next real fun dust-up according to my friend Massimo is going to be between Italy and Germany.  Everybody north of the Rubicon is madder than hell and getting killed by Germany's undervalued currency.  Riddle me that one.

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